FTSE Global Markets by FTSE Global Markets

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THE NEW GEOGRAPHY OF DEPOSITARY RECEIPTS ISSUE 24 • MARCH/APRIL 2008

Remaking the case for enhanced cash funds Learning to live with the LBO overhang Towards 2020: The Asian Securities Services Review

MF GLOBAL: TRADING UP OFFSHORE EXCHANGES DEFINE THEIR COMPETITIVE EDGE

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FTSE GLOBAL MARKETS • MARCH/APRIL 2008

ncertainty is now the watchword as a sub-prime crisis that marred the summer of 2007 (and which most of us thought would last only a few months) now looks to have consequences that might be both recessionary and contagious. Clearly, markets have decoupled: not from the emerging markets, as many investors had hoped for (there are a growing number of pointers that growth will slow in the BRIC markets this year as well). Instead, the markets appear to be decoupling from fundamentals, evinced by the fact that credit markets look increasingly cheap even as they are stymied by a lack of investor interest and liquidity. Markets are, in fact, not behaving as they should because of technical imbalances: hence high yield loans are in many instances trading worse than high yield bonds, even through the underlying security behind the loans is often of a superior quality. The global credit markets are a bellwether of these contra-trends and point to contagion throughout the financial markets. One of the problems facing the credit markets and the Federal Reserve, for instance, is the rate differential between the London Interbank Offered Rate (Libor) and short term US treasury rates. The LIBOR rate normally stays even with the Fed Funds rate and other short term rates. However, since September last year we have seen LIBOR rise while US short term rates dip. In other words, banks continue to be worried about other banks and their credit problems. A significant part of the adjustable rate mortgages are priced off of the Libor, so this rise is a problem for those borrowers and proves there is a tightening in the credit markets globally, not just in the US. Whether financial institutions use VAR or economic risk as a benchmark what is clear is that risk is rising Not a good thing while so many banks are under stress. In that vein, what looked to be disastrous moves only weeks ago as Citi and Merrill Lynch sold portions of their stock to sovereign funds to help refinance their capital base now look rather canny. Once the bank reporting season is over and to comply with Basel II requirements many banks will have to reinforce their capital base, they might find that the markets have not loosened up enough to cope with the demand for money and any capital raising might come a lot less cheap than expected. Among the gloomier stories in the edition, Neil O’Hara looks at the prognosis—down but not entirely out—of enhanced cash funds, while Lynn Strongin Dodds highlights the debt overhang in the private equity market. Despite these low lights there are some highlights (some, not many, but some). These include German pfandbriefe which, writes Andrew Cavenagh, have shown notable resilience in a rather testing market environment. Moreover, the enthusiasm and optimism of the opportunity for asset service providers in Asia’s still fast growing markets, despite a relative slowdown this year, is hard to ignore. The pointers towards paradigm shifts in the global financial markets in the midst of this market melee are all around us. Some are obvious, others less so. On a much more positive note, the Asian Asset Servicing roundtable, which forms part of our ongoing Towards 2020 series of roundtables and features this editorial year, highlights the promise and market diversity of the Asian markets. We assembled a group of experts who have carefully outline the prospects (and problems) of developing common services platform in a region which is still fragmented but which will provide the benchmark for new complex and global service structures during the coming decade. Watch this space.

Francesca Carnevale, Editorial Director March 2008

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Contents COVER STORY COVER STORY: MF GLOBAL: EARTHLY AMBITIONS

..........................Page 78 If volatility helped dampen MF Global’s NYSE debut, it has also worked to the company’s advantage during its first six months as a public entity. The firm has benefited from the instability and ensuing high trading volumes driving the markets of late. In short, says MF Global CEO Kevin Davis, “It doesn’t really matter which way the markets move―so long as they do move.” Dave Simons reports on the new wunderkind on the block.

DEPARTMENTS MARKET LEADER

LIVING WITH THE LBO DEBT OVERHANG ................................................Page 6 Who wants to be an LBO specialist in this market? Lynn Strongin Dodds finds out.

THE RISE AND RISE OF DEPOSITARY RECEIPTS ......................Page 14

IN THE MARKETS

Neil O’Hara looks at the persistent popularity of DRs

WHATEVER HAPPENED TO ENHANCED CASH FUNDS? ..Page 22 Neil O’Hara tests the appeal of short term cash funds in a difficult market

INDEX REVIEW REAL ESTATE REPORT

WATCHING THE MERCHANTS OF DOOM AND GLOOM

....Page 26 Simon Denham, managing director, Capital Spreads, looks at the main indices

THE SUSTAINED APPEAL OF ASIAN TOURIST REAL ESTATE

....Page 28

Mark Faithfull’s round-robin of benchmark tourist investments in Asia

SAUDI ARABIA: THE CONTINUING OIL FACTOR ....................Page 32

COUNTRY REPORTS

The infrastructure of Saudi Arabia’s capital markets boom

RUSSIA’S SEARCH FOR EFFICIENT ENERGY REVENUE

......Page 49 Will 2008 mark a watershed for the growing power of Russia’s energy sector?

SGX & PARTNERS REVAMP ST INDEX FAMILY

STOCK EXCHANGE REPORT

........................Page 42 How SGX and its benchmark indices support Singapore’s regional aspirations

ASPIRATIONAL CME ........................................................................................Page 44 Why CME’s bid for the Nymex has global repercussions

BOVESPA WINS OUT OVER MERIVAL..............................................Page 47 John Rumsey explains the advantages enjoyed by Brazil’s keynote exchange

THE SLOW REBOUND FOR SPANISH COVERED BONDS ..Page 81

DEBT REPORT

The credit crisis has hit Spanish covered bonds harder than most. Why?

THE RESILIENCE OF THE PFANDBRIEF MARKET ....................Page 85 Andrew Cavenagh examines the advantages of a supportive regulatory regime

INDEX REVIEW 2

Securities Lending Trends by Data Explorer ............................................................Page 95 Market Reports by FTSE Research ..............................................................................Page 96 Index Calendar ............................................................................................................Page 104

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

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Contents FEATURES SECURITIES SERVICES REPORT: US CUSTODY IN THE SPOTLIGHT Page 52 It wasn’t all that long ago that the processing of OTC derivatives on immature legacy systems required a fair share of hands-on intervention. “STP and OTC were words not often used in the same sentence,” notes Stephen Bruel, Tower Group analyst for Securities & Capital Markets. As the flow of derivatives activity became a torrent custodians are stepping up to the plate, and the quest for comprehensive derivatives processing, trading and valuation solutions is now taking shape. Demand for OTC derivatives continues to blaze a path of opportunity for domestic custody players. However, the complex solutions needed to support these asset classes require a major overhaul of outdated legacy systems. How are custodians dealing with the challenge? Dave Simons reports from Boston.

TOWARDS 2020: ASIAN SECURITIES SERVICES ROUNDTABLE ..Page 58 The asset management business globally and especially in the Asia-Pacific is evolving into a one-stop shop. Fund managers, pension funds; government or sovereign wealth entities now expect services ranging from the most basic such as global custody to the more value added services (such as performance measurement; compliance reporting ; revenue enhancing products or securities lending). Asian manufacturers are becoming more sophisticated and their range of investments has increased: with same segment customers asking for example hedge fund administration or private equity administration. What next?

THE ASIAN SECURITIES SERVICES CHALLENGE ................................Page 70 Establishing a cohesive asset service array in a highly fragmented regional market poses challenges for providers. With Asia’s burgeoning equity and debt markets at different levels of maturity and complexity, offering the right package to the right client is not easy. Not only that, Asia’s manufacturers and distributors are not waiting for interim services even as their local markets (and regulators) evolve. They are after a high level of service and connectivity irrespective of the limitations of their own market. Can providers meet the challenge? Scott McLaren, managing director of RBC Dexia Investor Services in Hong Kong sits in the Q&A hot seat

THE COMPETITIVE WORLD OF OFFSHORE EXCHANGES ..Page 89 Tamara Menteshvilli, chief executive of Channel Island Stock Exchange (CISX), comments, “The credit crunch is changing the landscape and undoubtedly, we have seen the last of the collaterised debt obligations (CDOs). There has been a knock on effect on other asset classes and I think several property funds are holding fire until things settle down. Listings will not come to a standstill but only slowdown, as investors become more selective and risk averse.” Stock markets both onshore and offshore across the globe are in for a tumultuous ride this year. The volatile conditions, though, have not stopped the exchanges from marketing their wares, honing their offerings and working on new services. Lynn Strongin Dodds reports.

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

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Market Leader LBOs: FLIGHT TO QUALITY AS CREDIT TIGHTENS

LBOs: Learning to live with debt overhang Although the market is tightening, it would still have been difficult to beat last year’s $1.5trn worth of transactions in the US between January and the end of November 2007 (according to Dealogic figures); up from the $1.4trn in the whole of 2006; itself a record. Giant LBOs including TXU Corp., Alltel Corp. and First Data Corp., dominated 2007’s deal calendar and in May last year alone more than $116bn worth of US deals, half of which were LBOs adds Dealogic. However, as sub prime woes morphed into a global credit crunch. In this photo, harking back to the LBO boom in the first quarter of last year, Frederick M. Goltz, left, describes his thoughts regarding the purchase of TXU by his company, during a hearing held by the House Committee on Regulated Industries, Tuesday, on February 27th 2007, in Austin, Texas. Golz is with Kohlberg Kravis Roberts & Co. TXU’s Thomas Baker is on the right. Photograph by Harry Cabluck, supplied by AP Photo/PA Photos, February 2008.

CCORDING TO RECENT data by Standard and Poor’s the average yield spread on leveraged buyout loans sold to banks rose to 278 basis points (bp) over the London Interbank Offered Rate (Libor) by early December 2007—the highest level in at least a decade. Spreads measure the extra interest rate paid on debt versus benchmark rates such as Libor; the wider the spread, the riskier the loan. Moreover at the same time, spreads on buyout loans sold to mutual funds, hedge funds and other institutional investors, which are considered more risky, jumped to 326 bps, up substantially from the typical 256bp spread in the first half of 2007. It is a harbinger of a downturn in new issue volumes, at least in the first half of

Bear Stearns says funding needs for leveraged buyouts (LBOs) now total some $301bn, including about $89bn of bonds and $212bn of loans. Whether debt volume of that magnitude can be raised in current market condition is moot. The mergers and acquisitions (M&A) market appears to have changed—fundamentally. After two record-breaking years, US M&A will likely subside in 2008 as the credit crunch sidelines some private equity firms and the economic slowdown quashes other deals. Even so, companies bought by buyout firms in recent years could yet make acquisitions through the year, keeping overall activity at healthy levels even though cheap credit is hard to find. The higher cost of debt will likely focus buyout firms on the prospective financial returns of target companies more intently. Will 2008 harbinger a flight to quality? Lynn Strongin Dodds reports. 2008, as a more strenuous credit environment means any LBO deals done will have to make do with lower leverage (typically in a buoyant market, the leverage to equity ratio is 70:30).

One of the biggest obstacles in the LBO world right now is the difficulty banks are having in offloading their debt. That is because the credit crunch hit thick and fast. Some buyouts were

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Market Leader LBOs: FLIGHT TO QUALITY AS CREDIT TIGHTENS

Although the market is tightening, it impacted immediately, such as the US and Western Europe is expected Cerberus Capital’s acquisition of to emanate from the mid-market would still have been difficult to beat Chrysler, which was disrupted at the arena, but even there investors and last year’s $1.5trn worth of transactions end of July. Investment banks had bankers are likely to be more in the US between January and the end committed to lend money to pay for discerning. As with many crises, there of November 2007 (according to this and other deals, hoping to sell the is a sudden rush back to the nitty gritty Dealogic figures); up from the $1.4trn debt to investors at a later date. When fundamentals of an investment. In the in the whole of 2006; itself a record. credit markets seized up, these firms case of private equity, operational value Giant LBOs including TXU Corp., Alltel were left holding so-called “hung has once again become a catchphrase Corp. and First Data Corp., dominated loans.” Take the recent closing of the across the deal spectrum. As Ralph 2007’s deal calendar and in May last $18bn LBO of Harrah’s Entertainment, Aerni, head of private equity at SCM year alone more than $116bn worth of the casino operator, by Apollo Strategic Capital Management, a Swiss US deals were signed, half of which Management and Texas Pacific Group. based private equity investment were LBOs (compared with about The deal, which was announced in adviser, explains: “There will be a $427bn globally). As sub prime woes December 2006, finally received greater focus on returns driven by morphed into a global credit crunch, investors became warier of approval from gaming lending money to finance officials late last year. LBOs. By November, less However, banks, including than $3bn worth of LBOs the like of Bank of America Any and all noise this year in both the were announced in the US. and Deutsche Bank, have US and Western Europe is expected to All the talk was been reportedly unable to emanate from the mid-market arena, but concentrated in the first entirely clean their debt even there investors and bankers are half. The third quarter only slates and in some witnessed about $79.4bn instances have been forced likely to be more discerning. As with deals being publicised to hold onto the bulk of it many crises, there is a sudden rush back globally, less than half of due to adverse trading to the nitty gritty fundamentals of an the $216.6bn recorded in conditions. investment. In private equity’s case, the second quarter. As for If they don’t get the operational value has once again become the fourth quarter, the tally loans and bonds off their a catchphrase across the deal spectrum. was a mere $22.1bn, the balance sheets, they may lowest quarterly total be less willing to finance Dealogic has recorded in at future LBOs. Of the least three years. $350bn to $450bn credit The mega-deal market bore the overhang reported early in the second operational improvement and not financial engineering. brunt of the impact of the credit half of 2007, approximately $245bn through was left by the end of the year, say Investors will pay more attention to a crunch. No deals over $10bn have been market analysts. Given a fair wind, company’s past performance, earnings concluded since July 2007 in the US, that backlog could begin to clear before interest, taxes, depreciation and while transactions between $1bn and during the first quarter of 2008, say amortisation (EBITDA), competition, $10bn saw average monthly volume some analysts; helping the market for sales growth and plans for expansion.” plummet to $5bn in the second half of Chris Ward, global head of corporate 2007 from $30bn in the first half. The LBO financing to reset itself. Others are more pessimistic. At a recent finance advisory group at Deloitte, middle market has proved more conference in New York, Hamilton thinks that, “There will be a much resilient. A total of $27.1bn worth of James, president and chief operating greater emphasis on where general middle-market transactions—between officer of Blackstone Group, spoke for partners can add value. While it lasted, $100m and $1bn—were broadcast in many when he said it would take refinancing was a convenient way to the second half of 2007, down from much longer than anticipated. Now, return money to limited partners who $38.3bn in the first half of the year. The the prediction is within about 12 wanted to reinvest. However, it is not a number of transactions dropped to 68 substitute for growing a business’value from 98. Europe and the UK, the months or so. world’s second most active in terms of Any and all noise this year in both and profits.”

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

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Market Leader LBOs: FLIGHT TO QUALITY AS CREDIT TIGHTENS

deal volumes, suffered a similar fate of a stalled second half. The UK private equity market plunged dramatically by 80% to £2.9bn in the fourth quarter compared to £15.4bn in the third quarter, according to figures by the Centre for Management Buyout Research (CMBR), founded by Barclays Private Equity and Deloitte. UK buyouts fell to just $21.6bn in the last six months of 2007, which ranked as the lowest level since the first half of 2005 and down 67.6% compared to the first half of 2007 when $66.9bn of deals were completed. Even so, elsewhere in North America some buds of spring appear to be pushing through hard ground. Ontario Teachers’ Pension Plan chief executive officer Jim Leech repeatedly told the press that his pension fund and its partners, Providence Equity Partners and Madison Dearborn Partners plan to complete its C$51.7bn ($50.8bn) takeover of Canadian telecom giant BCE Inc. on schedule early in the second quarter. It hasn’t been easy. BCE shares have plunged as some shareholders doubt the deal will close with its original terms intact and Leech himself is reported in the Canadian press to have stated that “The intrigue around [BCE] never seems to end,” adding that he receives almost daily calls from investors inquiring about the deal’s financing, he added: “I look forward to the day when [BCE] is out of the public eye.” In mid February this year, Standard & Poor’s (S&P) cut its ratings on Univision Communications Inc., citing the company’s significantly increased financial risk due to its impending LBO. Univision’s shareholders approved a $12.3bn deal to sell the company last September to a consortium including private equity firms and media mogul Hail Saban. Including the assumption of $1.4bn debt, the $36.25 per share deal is

valued at about $13.7bn, the company said. S&P’s two-notch downgrade reflects Univision’s significantly increased financial risk following its pending LBO, which will be financed by $10bn of debt upon closing of the transaction,” S&P said in a statement. S&P cut Univision’s corporate credit rating to “B,” five levels below investment grade, from “BB-minus.” The outlook is negative, indicating an additional cut is likely over the next two years. S&P also awarded a“B”bank loan rating to the company’s senior secured credit facility, and a “CCCplus” rating, seven levels below investment grade, to the company’s second-lien term loan.“The two-notch differential between the rating on the group’s second-lien debt and the corporate credit rating acknowledges the materially disadvantaged recovery position of these debt issues relative to the group’s substantial senior secured bank debt,”S&P said. Financing structures, of course, are also undergoing a major overhaul. Although all players stress that stringent due diligence has always been a priority, through the early part of 2007 more than a few deals were blindsided by potentially mouth watering double digit returns. The credit crunch may have sounded the death knell, for now, of the controversial“covenant lite”loans.They may have resembled traditional syndicated loans, but they did not carry the legal clauses that allowed investors to monitor the performance of a risky borrower or declare a default if financial guidelines were breached. They were invented in the US about three years ago and they first debuted on the European scene in 2007. In March last year Linklaters’ acquisition finance team scored a high-profile mandate after advising on two ‘covenant-lite’ financings for JP Morgan.The firm advised JP Morgan as

Ontario Teachers’ Pension Plan chief executive officer Jim Leech repeatedly told the press that his pension fund and its partners, Providence Equity Partners and Madison Dearborn Partners plan to complete its C$51.7bn ($50.8bn) takeover of Canadian telecom giant BCE Inc. on schedule early in the second quarter. It hasn’t been easy. BCE shares have plunged as some shareholders doubt the deal will close with its original terms intact.The photograph is of BCE Inc’s chief executive officer Michael Sabia, at a recent company meeting in Montreal. Photograph by Ian Barret, supplied by AP Photo/PA Photos, February 2008.

arranger and debt provider for Apax on its acquisition of a 49.9% stake in Trader Media Investments from the Guardian Media Group for £1.35bn. The deal followed a similar transaction for JP Morgan, in which Linklaters advised on the refinancing of the senior debt of VNU World Directories, also owned by Apax and fellow buyout house Cinven, on a covenant-lite basis. The covenant-lite lending structure sees the borrower severely limit its reporting requirement to lenders and also curbs the creditors’right to declare a default on the loans. Instead ‘incurrence covenants’ are agreed, which mean the borrower only has to reveal its financial performance in certain circumstances, such as if it wishes to borrow more money. The financing trend, was pioneered in the US in response to the increasing power of private equity houses in negotiating finance terms. Traditionally, lenders in Europe insisted on stringent covenant package and the appearance of “covlites” were a cause of concern in some quarters that the private equity market was overheating. The loosening and, in some cases, removal of covenants simply reflected the burgeoning leverage levels and the growing replacement of subordinated mezzanine loans

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Market Leader LBOs: FLIGHT TO QUALITY AS CREDIT TIGHTENS

with larger senior loans. Today, the banks in Europe and the US have put back the safeguards in these deals. As Aerni says, “The hype is gone. Financing is tighter and the holding periods are slightly longer. There will also be more equity and less debt put in. While these tighter conditions will result in lower investment returns, we are back to a more realistic and sustainable environment.” Vendors will also have to come to terms with a new regime, which has seen valuations drop by 15% to 20% in the past six months. They are unwilling, though, to accept price tags that reflect the depressed state of the market and will only sell if they have to. Armando D’Amico, managing partner of Acanthus, an independent corporate finance advisory firm, notes, “So far, pricing has not come down. There is currently a mismatch between what the vendors and buyers expect. Vendors are still hoping to get the same price that their neighbour received two years ago. I think there will be a period of readjustment.” As a result, there has been little movement, particularly at the higher end. Aerni, comments, “I think the situation is the same on both sides of the Atlantic. If you look at the statistics there have not been that many deals announced since the summer and I do not expect there to be much activity in 2008.” Industry estimates reveal that over $45bn worth of LBO deals have been pulled in the US, the world’s largest LBO market since the summer. These include the $1.8bn sale of PPH, a mortgage and vehicle fleet company to Blackstone and General Electric; Cerberus Capital Management’s aborted $7bn bid to acquire United Rentals, an equipment renter group; and Kolhberg Kravis Roberts’ decision to walk away from the $8bn purchase of Harman International, an audio equipment manufacturer. At the

moment, all eyes are on the fate of Blackstone’s proposed $6.76bn acquisition of Alliance Data Systems, a credit card transaction processor as well as the nearly $200m sale of broadcaster Clear Channel to private equity groups Bain Capital Partners and Thomas H Lee. The Federal Communications Commission gave its green light for the deal to go through and now only the Justice Department’s approval is needed. However, there are concerns that the private equity partners will not have the stomach to close the deal and that the banks will not support them. Looking ahead, the general consensus is that the midmarket will continue to weather the storm, particularly in distressed situations, restructurings, healthcare and renewable energy. John Gripton, a managing director and head of investment management Europe at Capital Dynamics, a private equity asset manager, says, “The mid-market sector has not been impacted in the same way as the larger end because the deals have historically not been leveraged to the same degree. We are seeing transactions being announced and completed across the board.” Although the deal sizes may be smaller, it will still be difficult to pry open the banks’lending wallets. Simon Tilley, a managing director of Close Brothers Corporate Finance, notes, “Deals are being done in the midmarket but they are much harder because of the financing. Banks do not want to take the underwriting risk and even for deals as small as £50m, you can still expect to see these being financed on a club basis.” The midmarket is also in danger of becoming overcrowded as the larger and global players are moving down a notch to take advantage of smaller to medium sized cash generating companies trading at a discount. “The big buyout houses will not be able to obtain the

Simon Tilley, a managing director of Close Brothers Corporate Finance, notes,“Deals are being done in the mid-market but they are much harder because of the financing. Banks do not want to take the underwriting risk and even for deals as small as £50m, you can still expect to see these being financed on a club basis.”The mid-market is also in danger of becoming overcrowded as the larger and global players are moving down a notch to take advantage of smaller to medium sized cash generating companies trading at a discount. Photograph kindly supplied by Close Brothers Corporate Finance, February 2008.

financing for the mega deals but they still have a lot of money to put to work. As a result, we will increasingly see the big buyout houses look in the mid market region. The £100m to £200m space has started to get very congested,”says Tilley. There has also been activity in the higher end of the mid-market with Apax and Guardian Media Group making a joint £1bn offer for EMAP’s business-tobusiness publishing assets. Meanwhile, Kohlberg Kravis Roberts acquired Northgate Information Solutions, a UK human resources software company for £593m in December. In addition, Blackstone is hoping to take a minority stake in Lattelecom, a Latvian national telecommunications company in a deal worth 128m. The other trend is minority stakes. According to Thomson Financial, a data provider, overall private-equity firms globally more than doubled their activity to 848 minority investments valued at $49.1bn last year from $21.6bn in 633 investments for 2006. The activity was most marked among buyout groups in the wake of the credit crunch. They spent about $30bn for minority holdings in the second half of 2007, which was over 45% more than was invested in the first half and double that invested in the same period of 2006.

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In the Markets DEPOSITORY RECEIPTS: BACK IN STYLE

Photograph kindly supplied by istockphoto.com, February 2008.

THE GLOBAL APPEAL OF DRs As investors have broadened their horizons beyond their home market, depositary receipts have evolved from a relatively obscure backwater of the US equity market to a global phenomenon. Conceived as a way to facilitate trading in foreign securities by US investors, depositary receipts have today taken root in London, Luxembourg, Singapore and Dubai as well as New York. The issuers have changed, too; the European blue chips that once dominated new issuance have taken a back seat in recent years to companies in emerging markets seeking to raise capital from foreign investors. The tectonic shift has altered the pecking order among the four banks who act as depositaries, too. Neil O’Hara reports. HE IDEA BEHIND depositary receipts (DRs) is deceptively simple: to permit local investors to trade a foreign security as if it were a domestic stock. A bank acting as depositary buys the underlying shares in a foreign market and issues receipts to investors that trade like a local security. For example, most American Depositary Receipts (ADR) are listed on either the New York Stock Exchange (NYSE) or NASDAQ, where they are priced in US dollars and conform to T+3 settlement no matter

what currency or settlement terms apply to the underlying shares. ADRs pay dividends in US dollars, and investors receive annual reports, notices of corporate actions and other shareholder communications in English. An ADR may represent a single share, multiple shares or a fraction of a share to align the dollar price with domestic norms, too. For individuals or institutions for whom foreign share ownership is either prohibitively expensive or prohibited, ADRs offer diversification because they

count as domestic securities. “Depositary receipts make it easy,”says Anthony Moro, vice president and head of Americas depositary receipts business development at The Bank of NewYork Mellon,“They roll out the red carpet and build a bridge to the US market.” Depositary receipt issuers get access to the world’s largest financial asset pools, whether in NewYork, London or up-and-coming centres like Dubai. Moro says several academic studies have demonstrated that depositary

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In the Markets DEPOSITORY RECEIPTS: BACK IN STYLE

receipt issuers often get a higher valuation for the underlying shares because they are tapping a larger investor base and must conform to international standards for accounting and corporate governance. Capital raising is not the only reason companies initiate depositary receipts programmes, however. Multinational corporations that want to compensate local employees with stock options or restricted stock use depositary receipts to facilitate subsequent trading and cut employees’ transaction costs. Others use depositary receipts to build brand equity in a foreign market through improved visibility, name recognition and analyst coverage. Issuers can also use depositary receipts as an acquisition currency, even if they do not raise capital in the first instance. European and Japanese companies still account for more than half the market value of outstanding depositary receipts, but Moro says companies based in the emerging markets, and especially Brazil, Russia, India and China (the BRIC countries), account for perhaps 75% of asset growth.“In recent years it has been all BRIC all the time,” he says, “They are doing the most initial public offerings (IPOs) and follow-on offerings with depositary receipts, they are growing the fastest and they have the highest returns.” The Bank of New York Mellon today manages 1295 depositary receipts programmes, more than 60% of the number of sponsored issues outstanding. Moro points out that Global Depositary Receipts (GDR) issues are often aimed at US investors even though they trade in foreign markets. They are usually priced in US dollars rather than the native currency and while retail US investors cannot buy them regulations do permit qualified institutional buyers to participate in both the secondary market and capital

raising. ADR issuance slumped in the years following passage of the Sarbanes-Oxley Act because many foreign issuers saw no reason to incur the administrative burden or expense required to comply. GDR issuance ballooned as a result, which boosted London’s share of international capital raising and fuelled demand in newer venues such as Singapore and Dubai. Trading in DRs has exploded along with the market value of depositary receipts. Moro says dollar volume for all depositary receipts—including GDRs as well as ADRs—surpassed $3trn in 2007. In another sign, the centre of gravity has shifted east, the most active individual issue last year was Baidu.com, the Chinese Internet search engine, whose depositary receipts listed on NASDAQ traded almost $230bn worth. A company that did not even exist a few years ago blew right by the Western European names such as British Petroleum, Royal Dutch Shell and Nokia that topped the active list in the past. The surge in trading has played into Citi’s hands, according to Nancy Lissemore, the bank’s global head of depositary receipts. For the last 16 years, depositary receipts programmes handled by Citi have had the highest average trading volume, which Lissemore attributes to its focus on quality over quantity. In 2007, the top five IPOs accounted for 36% of the total IPO capital raised, and Citi acted as depositary for two of them: a $2bn ADR offering on the NYSE for base metals miner Sterlite Industries (India)—the largest ever capital raising for an Indian company—and a $1.35bn NYSE-listed ADR issue for Innolux Display Corp., a Taiwanese maker of liquid crystal panels. “We target companies where we believe that we can build liquidity,” Lissemore says, “Many of these companies have existing relationships with Citi.”

“Depositary receipts make it easy,” says Anthony Moro, vice president and head of Americas depositary receipts business development at The Bank of New York Mellon,“They roll out the red carpet and build a bridge to the US market.” Photograph kindly supplied by Bank of New York Mellon, February 2008.

In Citi’s experience the most liquid depositary receipts have a large proportion of trading outside their local market. London’s growing stature as a financial centre and improved liquidity in other European markets since the introduction of the euro have lessened the importance of depositary receipts programmes for European issuers. Demand for capital from emerging markets has filled the void just as—or perhaps because—investor interest in those countries has mushroomed in recent years. Citi’s extensive global network [it has branches in more than 100 countries] gives the bank name recognition as well as local in-house expertise to help the companies that now dominate depositary receipt issuance. Lissemore says Citi has also advised regulators in countries such

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In the Markets DEPOSITORY RECEIPTS: BACK IN STYLE

as Brazil and Russia that are trying to develop a market in native currency depositary receipts to facilitate foreign investment by domestic investors and stake their claim as a regional financial centre. Lissemore stresses the importance of investor relations support in wooing clients, particularly those for whom a depositary receipts issue represents their first introduction to international institutional investors. “Citi has an unmatched distribution platform for retail, mid-tier and institutional investors,” she says, “We help companies get access to these different investor bases.” For Deutsche Bank, the last of the four depositary banks to enter the business, the growth in GDR and emerging markets issuance was serendipitous. Deutsche got into the game when it acquired Bankers Trust in 1999. As the fourth player competing against three rivals who had set up shop decades earlier, Bankers initially focused on GDRs and emerging markets to differentiate itself. Akbar Poonawala, head of Global Equity Services at Deutsche Bank, says Bankers’ depositary receipts team became part of a broader equity services group at Deutsche and was able to build on the bank’s extensive network of global relationships. “All the stars were aligned,” says Poonawala, who has supervised Deutsche’s depositary receipts operation ever since the acquisition, “We had the Deutsche Bank franchise to leverage, the global footprint, and we had the experience in emerging markets when the deal flow started getting GDR heavy.” Although Deutsche remains the fourth largest by number of programmes handled (240), it is nipping at the heels of JP Morgan Chase (243) in third place and within shouting distance of Citi in second (273). Poonawala says Deutsche has

had the largest percentage increase in the number of programmes for at least three years in a row. In addition to snagging a disproportionate share of new depositary receipts programmes, Deutsche has lured more than two dozen companies away from its competitors. The list includes trophy names such as SAP, Deutsche Telecom, Reuters, Tesco, Invensys, IONA Technologies, Akzo Nobel, Stora Enso, Wolters Kluwer and Tata Tea. Poonawala says issuers are attracted to the way Deutsche tailors the product to meet a particular issuer’s needs rather than selling a standardised package. Although depositary receipts issuers used to gravitate toward exchanges where their peers are listed, Poonawala has seen more bunching by country of origin in recent years. There are exceptions, of course, but Chinese companies tend to list on the NYSE, Brazilian issuers also favour the US, while Russian and Indian companies typically prefer London or Luxembourg. The choice of venue depends on the issuer’s purpose in issuing depositary receipts, which regulatory regime applies, what valuation an issuer can achieve and what incremental costs it may face. For example, ADR issuers have to restate their financial statements in accordance with US Generally Accepted Accounting Principles (GAAP), which differ in material respects from international standards. Technology companies may find the extra cost worthwhile because US investors are willing to pay a higher multiple of earnings, but Poonawala says other issuers can achieve their objectives through a GDR without incurring the expense. ADR issuance may revive in 2009 when the SEC will no longer require a reconciliation to GAAP. Issuers will be able to raise capital in the US provided their

Nancy Lissemore, Citi’s global head of depositary receipts. The surge in trading has played into Citi’s hands, according to Lissemore. For the last 16 years, depositary receipts programmes handled by Citi have had the highest average trading volume, which Lissemore attributes to its focus on quality over quantity. Photograph kindly supplied by Citi, February 2008.

accounts conform to the International Financial Reporting Standards. A successful depositary receipts programme has to generate adequate liquidity to sustain investor interest. For well-known global brands such as SAP, Deutsche Telecom and Infosys liquidity will follow as soon as they initiate the programme, according to Poonawala. “They have a fan following, an employee base, suppliers or buyers of their services, or communities in which they operate all familiar with their name,”he says,“They have an automatic existing pool of potential investors.” Companies that have less visibility have to work harder to create a following through intensive investor relations and shareholder communications work. Claudine Gallagher, global head of

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In the Markets DEPOSITORY RECEIPTS: BACK IN STYLE

depositary receipts at JPMorgan, says the bank’s investor relations support is a major selling point for both new clients and those who switch from other depositary banks. Issuers from countries with unsophisticated capital markets may have no idea how to conduct an investor relations campaign. “In China, getting the story out and talking to investors is very new,” Gallagher says, “They want guidance about whom they should talk to and who should present to investors.” Everybody knows the biggest investors such as Fidelity, but JPMorgan also targets smaller institutions that may have an interest in a particular issuer. Gallagher’s team includes career investor relations professionals as well as specialists who identify potential investors by scrutinising the shareholder registers of comparable companies in the same industry or region. JPMorgan advises issuers on what conferences they should attend, helps them get on panel discussions and sets up squawk box calls for those who want to attract retail investors.“We spend a lot of resources honing in on clients’needs,”Gallagher says,“Even big clients who have done investor relations for years will use our services for the targeting and feedback analysis.” JPMorgan, which originally invented the ADR, has tried to stay on the cutting edge. Last year the firm launched the first Colombian depositary receipts programme in more than a decade, Argentina’s first depositary receipts issue in London (for media conglomerate Grupo Clarin), the first ever GDR issue for a Nigerian company (GT Bank, also in London) and the first GDR issue listed on the Singapore exchange (for steel maker Uttam Galva Steels). Gallagher says depositary receipts trading volume jumped 55% in 2007 and the market value of outstanding

Most Active ADRs through November 2007 Issuer

Country

Exchange

Ticker

Value $m

Baidu.com

China

NASDAQ

BIDU

228,460

Companhia Vale do Rio Doce

Brazil

NYSE

RIO/RIOPR

106,369

Petrobras

Brazil

NYSE

PBR/PBRA

97,425

Nokia

Finland

NYSE

NOK

50,000

America Movil

Mexico

NYSE

AMX

49,582

Israel

NASDAQ

TEVA

48,891

NYSE

43,769 37,088

Teva Pharmaceutical BP BHP Billiton

Australia

NYSE

BHP/BBL

Focus Media

China

NASDAQ

FMCN

30,908

Infosys Technologies

India

NASDAQ

INFY

26,499

Source: Citi and other depositary banks

Most Active London-listed GDRs through November 2007 Issuer

Country

Exchange

Ticker

Value $m

OAO Gazprom

Russia

LSE

OGZD

103,087

Lukoil Russia

Russia

LSE

LKOD

63,915

MMC Norilsk Nickel

Russia

LSE

MNOD

36,519

Unified Energy System

Russia

LSE

UESD

24,285

Surgutneftegaz Russia

Russia

LSE

SGGD

16,198

JSC VTB Bank

Russia

LSE

VTBR

16,017

Rosneft (OJSC)

Russia

LSE

ROSN

13,015

Orascom Telecom

Egypt

LSE

OTLD

12,066

Samsung Electronics

Korea

LSE

SMSN/SMSD

8,034

Novatek JSC

Russia

LSE

NVTK

7,886

Source: Citi and other depositary banks

Largest Depositary Receipts Capital Raising Events – 2007 Issuer

Country

Exchange

Ticker

Value $m

JSC VTB Bank

Russia

LSE

3/15/2007

5,192

IPO

TSMC

Taiwan

NYSE

5/23/2007

2,563

Secondary

ICICI Bank

India

NYSE

6/25/2007

2,460

Secondary

Sterlite Industries (India)

India

NYSE

6/22/2007

2,016

IPO

Royal Bank of Scotland

NYSE

9/27/2007

1,600

Secondary

AFI Development

Russia

LSE

5/11/2007

1,540

IPO

PIK Group

Russia

LSE

6/5/2007

1,440

IPO

NYSE

9/13/2007

1,375

Secondary

Taiwan

LSE

11/6/2007

1,353

IPO

NYSE

12/7/2007

1,150

Secondary

Barclays Bank InnoLux Display Corp. Barclays Bank

Type

Source: Citi and other depositary banks

receipts rose an astonishing 92%. Capital raising rose, too, from $42bn in 2006 to $53bn in 2007, of which 74% was in GDR form and 26% in ADRs. “We continue to see tremendous

growth,” she says, “We believe strong demand will continue into 2008 not only on the investor side but also from issuers wanting to bring depositary receipts to market.”

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In the Markets ENHANCED CASH FUNDS: LIVING WITH ILLIQUIDITY

WHAT NOW FOR ENHANCED CASH FUNDS? “It is never the blow-up, it is the run on assets that kills you,” explains Crane,“Who the fellow investors are is almost as important as what the fund invests in.” He points out that retail money market mutual funds have come through the crisis relatively unscathed because they have a broad and stable investor base. Photograph © Dmitry Pichugin, supplied by Dreamstime.com, February 2008.

In mid December 2007 Bank of America Corp. announced it was closing a $12bn enhanced-cash fund, run by Columbia Management, a unit of Bank of America, which had only been offered privately to institutional investors. Bank of America told investors wanting to redeem their investments that they would be paid in kind (which means they get a share of the fund’s asset which have been put into a separately managed account). The fund will formally close once its securities mature (roughly 80% are reportedly due to mature within the next 18 months). Enhanced-cash funds invested in SIVs and several have been hit by withdrawals recently, including one managed by the state of Florida and another run by General Electric Co., while Federated Investors Inc., the thirdlargest manager of money-market accounts in the US, bailed out its Enhanced Reserve cash fund as declines in mortgage-backed securities caused the credit markets to seize up. Investors have been unwinding positions as unprecedented conditions in the short term debt markets have weakened the performance of some private cash funds. What now? Neil O’Hara reports. T DOES NOT take much to get cash managers excited. Their horizons are so short that credit risk on the highly-rated paper they usually buy is seldom a concern. They are always hungry for yield, however, and a few extra basis points can turn their heads. For treasurers who wanted a bit more return than a money market fund could offer, enhanced cash funds, which carry a premium yield but still invest in top quality credits, were a godsend—until, of course, the credit crunch took hold. When liquidity evaporated last

summer investors discovered once again that no lunch is ever free. Enhanced yield came with enhanced risks that investors chose to ignore while the good times rolled on. Now some investors who should have known better are licking their wounds. In the United States money market funds operate under tight restrictions that limit the maturity of their investments to a maximum of 13 months, cap the amount they can invest in any one issuer at 5% and confine them to AAA- and AA-rated paper to minimise credit risk.

In exchange for living in a straitjacket money market funds are permitted to use book value accounting so that their net asset value never wavers from $1 per share.They may be boring, but they are big: total assets exceeded $3trn in early 2008. In fact, they are big enough to distort the fixed income market. All that money is chasing maturities up to 13 months but nobody wants to buy 15 month paper. Traditional bond funds could, but they typically get more bang for the buck farther out on the yield curve. Enter the enhanced cash fund, a vehicle devised by Wall Street’s

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In the Markets ENHANCED CASH FUNDS: LIVING WITH ILLIQUIDITY

financial engineers to take advantage of a market anomaly the regulations created. These funds ply their trade one step beyond the money market universe so that managers can buy orphaned paper at a premium yield without sacrificing credit quality. Kellie Allen, senior portfolio manager and head of the taxable money market team at Tattersall Advisory Group, a Richmond,Virginia-based fixed income investment manager within Wachovia Corporation’s Evergreen Investments subsidiary, says enhanced cash funds have a weighted average life anywhere from 90 days to as long as one year— although most fall in the 90 day to 180 day range. The longest maturities they hold are typically 18 months for fixed rate investments but may be up to five years for floating rate notes. “They venture out into the asset-backed securities world—autos, credit cards and mortgages; all AAA-rated with fairly short average lives,”Allen says. Allen attributes the losses at some enhanced cash funds to a lack of liquidity—the worst, she says, she has seen in her 20-year career—rather than credit problems. With rare exceptions, assets held to maturity have paid out in full and on time. Allen says the liquidity crisis hit the entire fixed income market, including money market funds and ultra-short bond funds as well as enhanced cash funds. At about one year, ultra-short bonds funds have longer average lives than enhanced cash funds but they also take more credit risk. “Enhanced cash funds fill the space between money market funds and ultra-short bond funds,” says Peter Crane, president of Crane Data, a Web site and publisher that tracks money market funds,“They are cherry-picking around the edges.”A fund may buy 15month bonds, wait for the price to pop when the maturity shortens to 13 months and then sell to a money

market fund, for example. Crane says that while conservative enhanced cash funds closely resemble money market funds the more aggressive managers push the envelope to become more like short term bond funds. Enhanced cash funds first ran into trouble in August, when structured investment vehicles (SIVs) that owned big chunks of AAA- and AA-rated securities backed by US sub prime mortgages could not refinance maturing asset backed commercial paper (ABCP). Unable to raise new cash, they exercised their right to extend the maturity for up to 120 days. Investors panicked, and the market for extendible ABCP vanished overnight. Money market funds owned that paper for the most part. Enhanced cash funds owned some ABCP, but Crane says they also bought the SIV’s medium term notes and dabbled in the capital notes, the lowest tier in a SIV’s capital structure. Prices for the notes tumbled as investors feared SIVs would have to dump assets at deep discounts to pay off their short term debt, leaving note holders in the lurch. Although enhanced cash funds never guarantee the return of principal, they do attempt to maintain a stable net asset value (NAV). Crane says many investors ignored the possibility of loss. Buyers were not widows and orphans, either. Enhanced cash funds were sold only to “qualified institutional buyers,” sophisticated investors who should have understood the risk. Some did, it has to be said. When the sub prime mortgage meltdown sparked a liquidity crisis last summer, the ensuing flight to quality triggered massive redemptions from aggressive enhanced cash funds. They had to sell securities to raise cash, but at a loss—which undermined the upto-then stable NAV and prompted yet more investors to flee. To stem the outflow, some managers,

including Legg Mason (a subsidiary of Citi), Wachovia and Federated Investors, offered a principal guarantee, betting that the assets would pay out at par upon maturity because the credits were unimpaired. “It is never the blow-up, it is the run on assets that kills you,” explains Crane,“Who the fellow investors are is almost as important as what the fund invests in.” He points out that retail money market mutual funds have come through the crisis relatively unscathed because they have a broad and stable investor base. Enhanced cash funds depend on wholesale money, which is stable enough in normal market conditions but can turn on a dime in times of crisis.“When you are dealing in billions there is no such thing as cold money,” Crane says, “At that level, it’s all hot.” Faced with a rush for the exits, a handful of funds—including Bank of America’s Columbia Strategic Cash Portfolio and General Electric’s GEAM Enhanced Cash Trust—suspended redemptions, a drastic step managers rarely take because investors denied access to their money almost always head for the hills at the earliest opportunity. The rescue plans for frozen funds typically give investors a choice: take part of the money immediately at a modest discount and the rest at NAV later, or stay in the fund until the assets mature and receive NAV for the entire amount. A common theme among enhanced cash funds that ran into trouble was their use of leverage, according to Brad Adams, a senior vice president and product manager at Northern Trust in Chicago, Illinois. The funds’ inability to roll over their short term debt when liquidity dried up triggered the initial forced sales, but investors fled in droves after they reported poor returns. Adams, whose responsibilities include enhanced cash products, says some

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investors may have assumed that enhanced cash funds’ short duration implied low risk.“They didn’t have a lot of interest rate risk,” he says, “But by design they had other types of risk, including liquidity and credit risk.” Adams says Northern Trust offers only lower risk programmes that do not use leverage. Although returns will vary from month to month, they shoot for about 50 basis points (bps) above equivalent money market returns averaged over a complete interest rate cycle. To generate that excess return, Adams takes duration risk but keeps average credit quality top-notch. Northern does buy debt from securitised vehicles but sticks to the senior tranches to limit exposure to illiquid instruments. “We are conservative in many respects and look for a more modest return in exchange for that,” Adams says, “It suits the clientele we go after.” Jeff Tjornehoj, a senior research analyst at Denver, Colorado-based mutual fund tracker Lipper, says the problems that afflicted enhanced cash funds spilled over into ultra-short bond funds and loan participation funds, too. The latter, which buy high-margin bank loans typically secured on the assets of companies that have credit ratings below investment grade, have returned 4.35% over the past 10 years, about 100bps more than conventional money market funds. The high yield compensated investors for a loan participation fund’s longer average life and obvious credit risk.“They were very steady performers,”Tjornehoj says,“For a long time the risk didn’t present itself.” That changed in November, when the funds Lipper tracks lost 1.5% on average, a far cry from the steady 25bps to 35bps monthly gains investors had come to expect. Lipper does not track the institutional enhanced cash funds because most are private placements

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that don’t have to report performance. Tjornehoj considers enhanced cash funds “a laboratory experiment that blew up in a relatively contained environment” because managers had not marketed them to retail investors. Nevertheless, he expects the product to survive, albeit in a modified form that incorporates better risk controls. Investors in enhanced cash funds have suffered only modest losses so far. The GEAM Enhanced Cash Trust imposed a 4% haircut on immediate redemptions, while Columbia settled for a 2% penalty. For cash managers accustomed to guaranteed principal, the losses nevertheless came as a rude shock. However, it is a different story among ultra-short bond funds, however. Losses in mortgage backed and asset backed securities hammered two institutional funds managed by State Street Global Advisors (SSgA). A lawsuit filed by one investor, Prudential Retirement Insurance and Annuity, says the SSgA Government Credit Bond Fund lost 25% in July and August and the SSgA Intermediate Bond Fund lost 12% while the funds’ respective benchmarks gained 2% and 3%. Prudential, which seeks restitution of $80m, alleges that the funds changed their investment strategies without notice to investors. State Street blamed unprecedented market conditions and said“we intend to vigorously defend ourselves.“Funds promising a premium return on nearcash investments found a ready market among corporate treasurers who could park money they didn’t need right away as well as pension funds that have adopted leveraged strategies like portable alpha and liability driven investing. The swap overlays embedded in these strategies oblige the investor to pay out LIBOR, but managers often try to earn a higher return on the cash held as collateral to

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Brad Adams, a senior vice president and product manager at Northern Trust in Chicago, Illinois. The funds’ inability to roll over their short term debt when liquidity dried up triggered the initial forced sales, but investors fled in droves after they reported poor returns. Adams, whose responsibilities include enhanced cash products, says some investors may have assumed that enhanced cash funds’ short duration implied low risk.“They didn’t have a lot of interest rate risk,” he says,“But by design they had other types of risk, including liquidity and credit risk.” Photograph kindly supplied by Northern Trust, February 2008.

cover the cost of the swaps. Municipalities got in on the game, too, through centralised treasury funds managed by the state—but when Florida’s Local Government Investment Pool froze redemptions to stop a run on assets, some towns were left unable to pay their bills. After years of benign market conditions, even sophisticated investors apparently forgot that if returns look too good to be true, they probably are. No doubt they will vow not to make the same mistake again. Perhaps they won’t—but don’t bet on it. Institutional memories fade when new cash managers pick up the reins and face the same relentless pressure to capture a few extra basis points.

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Index Review INDEX SWINGS: VOLATILITY THROUGHOUT 2008

WAITING ON EVENTS Simon Denham, managing director, Capital Spreads. Photograph kindly provided by Capital Spreads, February 2008.

K GROWTH DATA—ASIDE from those associated with public finances and the trade imbalance—continues (remarkably) upwards at a reasonable rate. The numbers coming out of the United States however are increasingly dire. Those optimistic UK growth numbers touted by the Treasury, increasingly look to be in the line of ‘hope’ than ‘expectation’. Even Germany, which has appeared immune in recent months to the data of doom swirling the globe, now has a sniff of its own slowdown; with manufacturing orders slumping in recent weeks. Surprisingly, UK employment numbers are holding up. There are now (apparently) more people in jobs on our small little island than at any time in our history. The problem is the quality of these jobs; and perhaps

Volatility is the name of the game as indices swing wildly from minor bullish to major bearish; seemingly on the toss of a coin. Making informed investment decisions right now looks positively dangerous. Large institutional buyers are only coming in intermittently to hoover up stock when the attraction becomes just too good to ignore. In the main however, they are sitting back and (like everyone else) “awaiting events”. For this reason, market makers (who are getting very wary of holding any stock on their books), are adjusting prices sharply on very low volumes. It makes for wild moves in even the most boring of stocks. A rather subdued Simon Denham, managing director of spread betting firm Capital Spreads, dons an air of doom and gloom. more importantly, who is the employer. In such a low jobless environment it would be natural to suppose that the Treasury is raking it in and, on the flipside, that the social security budget would be falling. Unfortunately the opposite seems to be the case. Tax revenues are disappointing and expenditure is going through the roof. This leads to the assumption that many of the new positions are actually in the public sector itself. If the employment situation in the UK starts to slip in the same direction that the US is going, then those healthy employment numbers could unravel very quickly indeed. The deficit for 2007 is likely to come in at around £45bn, not including a whole raft of quasi-government expenditure that Gordon Brown has managed

somehow to shift, with a magician’s sleight of hand, out of the calculations. Added to this is the problem of sharply reduced Corporation Tax receipts from the financial sector, due to sub prime write offs and the expectations that the ongoing payments from the banks (and by association many other sectors) may be well below Treasury forecasts for some years. It has been estimated by cleverer people than I that even a modest slowdown would swiftly move this number towards a borrowing requirement in the region of £100bn! The US with its relatively low tax regime only has a deficit of around £200bn ($400bn). In this environment the spreads on UK government debt (aka gilts) could widen considerably and, this would correspondingly put serious

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downward pressure on equities. All in all this could well be a very long term problem which will dilute the attraction for UK stock for some time to come. The Bank of England seems to be acting like a general in the First World War—obsessed with old battle plans in a new conflict. Worrying about the odd bip here or there on inflation when the economy is slowly grinding to a halt appears ridiculous in the extreme. It is entirely the result of the limited remit under which it acts. The Bank is entirely focused on the one chestnut, namely price control and its only weapon is interest rates. The Bank has no power over the Treasury. In turn, the Treasury, nominally, has no power over the Bank of England. This might have seemed like a good

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idea in 1997 when the Labour Party inherited a sound fiscal state of affairs from the outgoing administration. Now it looks like a disaster waiting to happen. Rate decisions need to be taken on a much more ‘global’ view than just an inflationary vision. The Federal Reserve has aggressively cut rates in an attempt to bolster the flagging US economy and inflationary problems can, in local jargon simply “go hang”. In the current regulatory environment it is very difficult for us to think of the Bank of England’s monetary policy committee making the same move. Where does this leave investors? Many equities are offering very attractive yields at the moment and it is tempting to leap in with both feet in the expectation that such value

cannot last. In the current bearish environment, the sensible advice would seem to be; “by all means; dip a toe in the water and returns do look good”. But, and it is a big one, if the picture outlined above does come to pass, then we could be down here for some time. Therefore it is just as well to keep a considerable amount of powder dry. Remember in a falling market cash is generally king. This is particularly dismal message so early in the year but it is entirely in line with the current rather gloomy outlook. I will be more than happy if I am completely wrong; but I am worried. More signficantly, it seems that many of the major players are also fearful. As always …Place your bets Ladies and Gentlemen!

Don’t work in the dark, who knows what you might find Emerging Markets Report provides a comprehensive overview of the principal deals, trends, opportunities and challenges in fast-developing markets. For more information on how to order your individual copy of Emerging Markets Report please contact:

Paul Spendiff Tel:44 [0] 20 7680 5153 Fax:44 [0] 20 7680 5155 Email:paul.spendiff@berlinguer.com

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Real Estate Report ASIA REAL ESTATE: TACKLING THE BUBBLE

From January to November 2007 [the latest figures available] real estate developers in China (including those from Hong Kong, Macao and Taiwan) used $53.9bn of foreign capital, 71.9% more than during the same period in 2006. During that same period, slightly over $435bn flowed into China’s property sector from investors at home and abroad; an increase of 40.8% over the year before. Photograph kindly supplied by Istockphotos.com, February 2008.

China acts to let air out of the bubble With China’s central government worried about domestic inflation and an over-heated speculative property investment atmosphere that continues to hang over its stock market, restrictions on foreign investment in real estate are being touted to lance what is looking dangerously like a bubble. However, writes Mark Faithfull, with the economy largely accelerated by an enormous in-pouring of foreign capital, restricting foreign investments could potentially touch off a financial-markets implosion similar to the bursting of the dot-com bubble in US stocks in 2000, or the more recent US housing bubble. E’VE BEEN HERE before. In the early 1990s, emerging markets soared over 12 months with some stock markets, such as Hong Kong’s, rising in value by an incredible 90%. But when concerns about the economic health of key emerging economies surfaced, foreign investors abandoned ship and Asian stock markets tumbled. Now the soaring stock is Chinese real estate and rumours of a block on foreign property investment have surfaced after a worried China Ministry of Construction carried out a survey in November examining its existing policies to moderate foreign investment in Chinese real estate. Official figures from China’s National Bureau of Statistics unveiled a rapidly accelerating inflow of foreign money into a sector already on the brink of over-heating.

To this end, throughout last year China’s government developed a package of policies aimed at trying to stem the torrent of foreign money flooding its real estate market. Some of those policies gave teeth to an approval process that requires that foreign investors must comply with before they can buy Chinese property. The policies also made it easier to monitor the flow of foreign money into the housing market. In July 2006, China raised the required ratio of registered capital in property developers’ overall investment plans for a development, a big step in its effort to improve regulation and to cool speculation. China also placed tougher restrictions on residential property purchases by foreign institutions and individuals. Only foreign institutions establishing branches or representative offices in

China (and individuals working or studying in China for more than one year) can now buy apartments for their own use. The regulations have had some effect, but from January to November 2007 [the latest figures available] real estate developers in China (including those from Hong Kong, Macao and Taiwan) used $53.9bn of foreign capital, 71.9% more than during the same period in 2006. During that same period, slightly over $435bn flowed into China’s property sector from investors at home and abroad; an increase of 40.8% over the year before. China’s central bank increased lending rates six times last year amid efforts to slow investment flows and rein in the economy and the government stepped in to increase the minimum down payments on apartments from 30% to 40% in

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Real Estate Report ASIA REAL ESTATE: TACKLING THE BUBBLE

September. ING Bank suggests that, with uncertainty increasing, investors in Chinese property bonds should adjust their portfolios in favour of larger, diversified firms and cut their exposure to smaller developers which are focused on fewer cities. The bank is advising bond investors to remain invested in bigger firms such as Shimao Property Holdings, Agile Property Holdings and Hopson Development Holdings and says it expected less issuance from large developers this year. Tightening credit conditions in China, growing risk aversion in global markets, a property-sector slowdown in some Chinese cities and concerns about fresh bond supplies have widened credit spreads in the Chinese property sector. Bonds in firms with higher ratings, large land banks and diversified geographic focus remain worth buying because of their strong sales and resilience to property-sector downturns in selected cities says ING analyst Steve Chow. However, higher borrowing costs have not stopped developers betting on China’s economy, which is expected to expand between 10% and 11% this year according to the latest forecasts from Goldman Sachs and CICC. August’s debut of the Venetian Macao Resort Hotel perfectly reflected the extraordinary boom in Asia’s tourism and leisure property sector. “Historic, groundbreaking, and revolutionary,” hyped Sheldon Adelson, chairman and chief executive officer of parent company Las Vegas Sands Corp at the launch. “The Venetian Macao represents a massive paradigm shift for Macao and the future of tourism development in Asia.” He might just be right. The $2.4bn Renaissance-themed venue, like its sister property in Las Vegas, features replica Venice landmarks, three indoor canals with gondolas and gondoliers,

3,000 guest suites and 100,000 sq m of retail (larger than any of Hong Kong’s malls) and the 55,000 square metre casino floor is the biggest in the world. It is part of the Cotai Strip, a collection of hotels which will be run by the Four Seasons, Sheraton, St Regis, ShangriLa, Traders, Hilton, Conrad, Fairmont and Raffles. A 400-bed Four Seasons will open in the spring and 6,000 more hotel rooms on three sites will be added by the end 2008, then another three with 6,000 more rooms in 2009. “Macao is now targeting conferences and exhibitions, shopping and shows,” says Scott Hetherington, managing director, Asia, at the Singapore office of Jones Lang LaSalle Hotels.“It is trying to move from a one night destination to a three or four day location. Just like Las Vegas.” Gaming revenues in Macao surpassed the Las Vegas Strip (15bn against 14.8bn) last year, but Wynn Resorts has warned that it will delay construction of a new hotel tower after the Chinese government began restricting entry visas for residents of neighbouring Guangdong province, though Wynn is completing a $450m expansion of its Macao casino. InterContinental Hotels Group is currently the country’s leading international hotel group with 66 hotels and wants to double this by the end of 2008. Accor runs 44 hotels in China but plans to reach 125 by the end of next year and Hilton Corporation is operating with Deutsche Asset Management and HQ Asia Pacific. The dominance of Chinese entrepreneurs has left private equity investment in domestic firms as the easiest route in for many foreign investors. Home Inns raised over $109m in its October 2006 listing after investment from US-based venture capital firm IDG Ventures. It plans to quadruple the number of its hotels to

1,000 in a few years and expand outside China into Asia. Shenzhenbased 7 Days Inn, China’s fifth biggest chain, plans to triple its number of hotels to 200 this year after receiving a combined $95m injection from Merrill Lynch, Deutsche Bank and Warburg Pincus in September. Money is not just coming from Europe and the US. Dubai’s Emaar Properties is partnering Accor, while Jumeirah, another Dubai player, is looking to build 10 hotels by the end of 2010, guided by a new Singapore office, launched this March. The HanTong Jumeirah Shanghai opens this August, with another Asian launch later this year in Phuket, Thailand. Jumeirah is also eyeing Indonesia, Japan and India.“We are looking all over Asia but China is a key market. Two-thirds of our 16 hotels in Asia will be in China,” says Tricia Warwick, Jumeirah’s vice president of sales. Neither is Hong Kong expected to build casinos to compete. Hong Kong Secretary for Commerce and Economic Development Frederick Ma acknowledged that Macao “Is definitely somewhat of a challenge,” but said Hong Kong will instead build more convention space, invest in cruise ship terminals and expand theme park Ocean Park. Hong Kong itself has much to crow about. The economy continues to expand, registering close to 7% in the second quarter last year, up from 5.6% a year earlier, according to the Royal Institute of Chartered Surveyors (RICS). Moreover, a booming service sector economy has raised demand for office space at the quickest pace in two years and Hong Kong saw acceleration in investment demand activity, continuing the trend of the last 18 months. Capital values rose at the fastest pace in over two years with yields also declining at the most rapid rate in the survey’s history.

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Country Report SAUDI ARABIA: DECOUPLED BY OIL REVENUES

THE DECIDING FACTOR Despite the increases in government spending last year, there was still a budget surplus of $47.6bn; primarily because of the inclination of the government to err on the side of caution when predicting its income from oil. Last year it budgeted for a price of $42.5 per barrel and this year it is using a benchmark of $45 per barrel (even though analyst consensus has it that the average price will be in excess of $60 a barrel through 2008). “Historically this extra income has gone to one of three areas,” explains Brad Bourland, chief economist at Jadwa Investment. Photograph provided by Istockphotos.com, February 2008.

January saw a cold snap hit the Kingdom of Saudi Arabia with the lowest temperatures for 20 years. Rather than enjoying the usual winter sun and average temperatures in the mid 20°C range, the north of the country was covered with a blanket of snow. Temperatures in the capital Riyadh were well below zero, a once in a generation event. However, while its citizens may have been shivering in the cold, the economy has so far been insulated against the impact of the global credit crisis and its contagion of the global economy. High oil prices, a large budgeted increase in government spending and a booming private sector looks set to ensure that 2008 should be another banner year for the Kingdom. ESPITE HIGH OIL prices many commentators—particularly those outside the Kingdom of Saudi Arabia—thought that 2007 would be a year of stagnant growth. It was a natural assumption given the massive stock market falls of the previous year that saw the Tadawul All Share Index (TASI), the country’s key stock exchange index, eventually drop from a high of 20,634 on the 25th February 2006 to a low of 6,861 last June. It was assumed that in a market that is limited to Gulf Cooperation Council (GCC) country citizens and with limited institutional investor participation, falls of this magnitude would have a large

impact on the pockets of the Saudi retail investor base who dominate trading on the Tadawul. Despite this however, the Saudi economy posted gains of around 3.5% last year and according to various estimates is likely to bounce back to between 5.5% and 6.5% in 2008. Howard Handy, general manager and chief economist at Samba Financial Group believes that the limited impact of the fall off in the stock market on the wider economy can, in part, be put down to the relatively short term nature of the bubble. “Many of those who lost money in the fall of the TASI had already made significant gains over the

previous 12 months. or longer, which had not yet been realised.” In addition to this 2007 saw a welcome increase in government spending, which has seen year on year rises of 12.7%, 17.3% and 21.4% over the last three years— funded by record revenues from oil exports which account for 90% of government income. Despite the increases in government spending last year, there was still a budget surplus of $47.6bn; primarily due to the inclination of the government to err on the side of caution when predicting its income from oil. Last year it budgeted for a

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Country Report SAUDI ARABIA: DECOUPLED BY OIL REVENUES

As well as seeking funding price of $42.5 per barrel and this internationally, Saudi companies year it is using a benchmark of have also been tapping $45 per barrel (even though international investors keen for analyst consensus has it that the some exposure to the oil rich average price will be in excess of Kingdom. Last July Riyadh$60 a barrel through 2008). based Dar Al-Arkan Real Estate “Historically this extra income Development Company has gone to one of three areas,” (DAAR) , one of the largest real explains Brad Bourland, chief estate developers in Saudi economist at Jadwa Investment. Arabia, issued a five-year $1bn “There has always been a Sukuk-Al-Ijara—its second tendency to overspend and so Dubai International Financial some of this extra income has Exchange (DIFX) listed Sukuk in been used to fund this. In recent the space of six months. SABIC years much has gone to paying Robert Eid, managing director at Arab National Bank and a host of Saudi banks have down the domestic debt from (ANB) and Joyce A Phillips, president and chief operating also visited the Eurobond almost 120% in the late 1990s to officer of American Life Insurance Company (ALICO). market to raise capital over the 19% last year. In recent years Phillips recently met with senior officials from ANB in last two years as they seek to however the bulk has been used Riyadh as part of an inaugural trip to Saudi Arabia. widen their sources of capital. to build up foreign assets worth Photograph kindly supplied by ANB, February 2008. Gray thinks that debt funding $280bn held by the Saudi Arabian Monetary Authority (SAMA). think the market is now comfortable will play a crucial role in funding the Unlike Singapore or Kuwait, Saudi with the underlying structures and there development of the Kingdom.“In order Arabia does not have a sovereign exists a lot of interest from a number of to fund projects such as the wealth fund and some of these funds both state-owned and private development of the Ras Tanura refinery, may well be used in the future as the institutions to issue Sukuk. I expect that which is estimated to cost upwards of to translate into a significant number of $20bn, then a number of funding basis of one,” believes Bourland. new issues over the next 24 months options will be required. As much as Slow growth in domestic Sukuk which will in turn lead to greater trading 60% of projects such as these might be The government’s paying down of a opportunities in the secondary market.” funded by debt issuance and the widest Gray believes that the Sukuk possible variety of instruments and large portion of its outstanding debt and a buy-and-hold mentality in the structure used by Saudi issuers has investors will be tapped,” Gray avers. secondary market are often cited as some unique advantages over some of reasons for the relatively slow the Islamic structures used in other IPO pipeline remains strong development of the domestic debt markets. “Some Islamic structures that The difficult trading conditions over market in Saudi Arabia. The SR3bn offer an automatic buy-back at maturity the last 18 months have done little to domestic Sukuk issued by SABIC in July are not necessarily considered Shari’a dampen the initial public offering 2006 was supposed to herald the arrival compliant by all investors because they (IPO) market which last year saw 26 of a fully functioning debt market believe it is not a true sharing of the IPOs raising $4.76bn versus 10 in 2006 supported by a bond trading platform risk.” He believes that this gives issuers which raised $2.79bn and four listings on the Tadawul to allow secondary of Sukuks, as they have been structured in 2005 which were valued at just trading. To date however, only a further in Saudi Arabia (Sukuk Al-Istithmar) $1.67bn. While the number of listings two issues have come to market: a which are structured around the may have increased, the average size of second SR8bn Sukuk issue by SABIC concept of Al-Ijara, a unique advantage each IPO fell. This was primarily and a debut SR5bn Sukuk by Saudi in that they are universally acceptable. because of the large number of listings Electric Company (SEC). Timothy Gray, In turn, this development “will give by insurance companies (17 out of 26 chief executive of HSBC Saudi Arabia Saudi issuers access to the widest in 2007) for relatively small sums. Ltd which has arranged and lead possible investor pool which could in Combined, they only accounted for managed all three Sukuks believes that theory provide a competitive advantage $280m or just 5.9% of the total raised. a tipping point has now been reached.“I in terms of pricing,” adds Gray. Bourland explains that “a Tadawul

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2007

Awards for excellence

Best Bank in the Middle East

CY CMY

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Country Report SAUDI ARABIA: DECOUPLED BY OIL REVENUES

listing is a key requirement for all of the lead to disappointment for both the receive from their existing commercial 40 newly licensed insurance owner and the investors. When it is banking clients. “With a wellcompanies. Each company has to list at right however then being a listed established and fast growing least 10% of its equity at a price of SR10 company can spur a company onto the corporate banking business, we have a next level in terms of profile, access to natural competitive advantage over per share.” It is unlikely all of the insurance capital, corporate governance and newer firms. The first point of call for these firms when they want to take companies will survive. Nonetheless, growth potential,” adds Al-Sowalim. There is no shortage of companies the next step in their development— the presence of a large number of insurers on the exchange does at least willing to advise Saudi firms. Since the be that an IPO or external funding—is add greater depth to the Tadawul, creation of the Capital Markets their existing and trusted financial which boasts only 112 listed stocks Authority (CMA) in 2005 it has partner.” The large correction in (even though it is one of the the Tadawul at the end of largest emerging market 2006 undoubtedly had an exchanges in the world by The government’s paying down of a large impact on banks’ earnings market capitalisation). An portion of its outstanding debt and a buylast year primarily through a IPO however may not be and-hold mentality in the secondary decline in the amount the right solution for every market are often cited as reasons for the earned from brokerage fees Saudi firm says Adeeb Alrelatively slow development of the in 2007. Both Bank Al-Jazira Sowalim, chief executive and Bank Albilad officer (CEO) at Falcom domestic debt market in Saudi Arabia. The announced falls in profits of Financial Services (Falcom), SR3bn domestic Sukuk issued by SABIC 59% compared to the one of the new breed of in July 2006 was supposed to herald the previous year and Albilad investment banks operating arrival of a fully functioning debt market posted losses in the fourth in Saudi Arabia. Falcom supported by a bond trading platform on quarter of 2007 of SR27m launched in February 2007 compared to profits of with paid-up capital of the Tadawul to allow secondary trading. SR266, 000 for the same SR1bn, divided into 100m period of 2006. Not all shares at SR10 each, offering a comprehensive Shariah- licensed 81 institutions of which 35 banks were similarly impacted however compliant investments, mutual funds, are allowed to offer investment advice and those banks with the most diverse advice and financial services. At the and 52 brokerage services. Some are income streams faired best. SABB time of launch Falcom chairman Fahid the investment banking offshoots that posted profits in all four quarters last Al-Athel explained that “We offer local banks have been forced to spin- year which John Coverdale, managing tailor-made investment solutions out into standalone, wholly-owned director at SABB puts down to the applying modern investment theory subsidiaries. Others are well-known bank’s focus on core banking products and advanced management international firms such as BNP such as commercial lending. Riyad Paribas and Deutsche Bank, or Bank’s net profit in 2007 actually rose techniques.” “The lure of an IPO for a firm’s regional powerhouses such as 4% to SR3bn. Chairman Rashed Abdulowners is often very strong especially National Bank of Kuwait— all of Aziz al-Rashed puts this down to “the when you take into account the whom are keen to tap into the biggest bank's continuing focus on core attendant publicity and public market in the Gulf. The remainder are banking activities”and through a strong relations’ benefit. However it is not primarily Saudi institutions set up lending strategy which has led to a 12% always the correct option and it is with the backing of powerful Saudi increase in net banking income. While all banks are seeking to develop important that corporate finance teams investors and industrial institutions. such as ours ensure that an IPO is Each of them believes they have a new income streams ANB has taken this really the best option; rather than say a unique offering. However, Robert Eid, to new levels with its best of breed private placement or even a managing director at Arab National partnership approach. This has led to the straightforward commercial loan. Bank (ANB) thinks some of these new bank entering a joint venture agreement Rushing towards a market listing when institutions will struggle without the with DAAR, one of the largest real estate it is not the right option can potentially natural flow of business that banks developers in the kingdom, together

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Country Report SAUDI ARABIA: DECOUPLED BY OIL REVENUES

with its subsidiary Kingdom Installment Company (KIC) and the International Finance Corporation (IFC), for its realestate and home loan business. For heavy equipment leasing, ANB has teamed up with one of the world’s largest companies in the construction sector, Consolidated Contractor Company (CCC). ANB is also aiming to establish a bancassurance affiliate. Joyce A Phillips, president and chief operating officer of American Life Insurance Company (ALICO) recently met with senior officials from Arab National Bank in Riyadh, as part of an inaugural trip to Saudi Arabia. Phillips attended several meetings and private sessions with government officials and prominent local business people aimed at discussing the value of partnership opportunities.“To sum up, in some areas, such as investment banking, we believe that through ANB Invest we already have the right expertise in-house; but in other areas working in combination with world-class companies will enable ANB to develop products that exactly meet our clients’ personal and business requirements,”says Eid. Elsewhere, ANB’s strategy is to look overseas for selective investment opportunities. Having narrowly lost out in the auction for Bank of Alexandria last year, ANB is considering the possible acquisition of Banque du Caire. Egyptian officials have said the government plans to sell as much as 67% of the bank during the first half of 2008. Samba, one of the biggest banks in the Kingdom is also looking to spread its wings says Handy. “We already have operations in London, Dubai and Pakistan and have recently applied for a license to operate in the Qatar Financial Centre (QFC). International growth is an important part of our vision for the future as we seek to bring our brand of world class banking services to our customers across markets and around the world

Saudi IPOs: 2005 to 2008 Year Company

Date *

Issue size (SAR)

Issue size ($US)

2008 3 Al Inma Bank Zain Saudi Arabia 2 1 PetroRabigh Refining & Petrochem

April-08 February-08 12 January 2007

10,500,000,000 7,000,000,000 4,599,000,000

2,800,000,000 1,866,666,667 1,226,400,000 5,893,066,667

2007 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Dar al-Arkan AlKhaleej Training & Education Middle East Specialized Cables Al Sagr Insurance Trade Union Insurance Arabian Insurance Kingdom Holding Company Saudi Printing and Packaging Co UniTrans Jabal Omar Gulf United Insurance Sanad Insurance Al Ahlia Insurance Allied Cooperative Insurance group Saudi Arabian Insurance Company Saudi Indian Insurance Al Ahli Takaful Company SVCP (Fukharia) Saudi Kayan Arabian Shield Insurance Wala’a Insurance Salama Insurance SABB Takaful Saudi Fransi Insurance Medgulf Malath

08 05 05 27 27 27 10 30 23 09 19 19 19 19 19 19 19 08 28 17 17 17 17 17 17 03

December 2006 November 2007 November 2007 October 2007 October 2007 October 2007 July 2007 June 2007 June 2007 June 2007 May 2007 May 2007 May 2007 May 2007 May 2007 May 2007 May 2007 May 2007 April 2007 March 2007 March 2007 March 2007 March 2007 March 2007 February 2007 February 2007

3,329,424,000 156,000,000 441,600,000 84,000,000 105,000,000 80,000,000 3,228,750,000 396,000,000 285,480,000 2,014,000,000 88,000,000 80,000,000 40,000,000 40,000,000 40,000,000 40,000,000 26,450,000 202,500,000 6,750,000,000 80,000,000 80,000,000 40,000,000 35,000,000 31,000,000 20,000,000 142,444,650

2006 10 9 8 7 6 5 4 3 2 1

AIIC APPC Al Babtain Alhokair Sipchem Red Sea Housing Emaar Economic City SPM SRMG AlDrees

09 25 04 07 09 12 22 24 08 21

December 2006 November 2006 November 2006 October 2006 September 2006 August 2006 July 2006 April 2006 April 2006 January 2006

819,000,000 663,750,000 324,000,000 1,320,000,000 2,475,000,000 522,000,000 2,550,000,000 446,400,000 1,104,000,000 222,000,000

2005 4 3 2 1

Yansab Almarai Sadafco Bank Al Bilad

17 13 15 21

December 2005 July 2005 April 2005 February 2005

1,968,750,000 2,304,000,000 507,000,000 1,500,000,000

887,846,400 41,600,000 117,760,000 22,400,000 28,000,000 21,333,333 861,000,000 105,600,000 76,128,000 537,066,667 23,466,667 21,333,333 10,666,667 10,666,667 10,666,667 10,666,667 7,053,333 54,000,000 1,800,000,000 21,333,333 21,333,333 10,666,667 9,333,333 8,266,667 5,333,333 37,985,240 5,893,066,667 Total Insurance (17 out of 26): 280,505,240 Insurance (% of total value): 5.9%

218,400,000 177,000,000 86,400,000 352,000,000 660,000,000 139,200,000 680,000,000 119,040,000 294,400,000 59,200,000 2,785,640,000

525,000,000 614,400,000 135,200,000 400,000,000 1,674,600,000 * Date: Last day of Retail Subscription Period. Source: HSBC

and so as other opportunities arise we will look to pursue them.”Even relative newcomer Falcom has regional ambitions to become a pan-regional

player by 2013 and with a strong domestic market and strong product offering who would bet against the Saudi banks making their mark?

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Country Report SAUDI ARABIA: DECOUPLED BY OIL REVENUES

LEARNING TO LEVERAGE INVESTMENT IN A MARKET PRONE TO BUBBLES As result of more firms listing on the Tawadul and the stock market falls that have been a feature of the Saudi Arabian equity market of the last two years, investors will need to take a more sophisticated approach to their trading and investments particularly in a market subject to large swings over relatively short periods says Brad Bourland, chief economist at Jadwa Investment. “The Saudi market, like China, is bubble prone. A mix of high oil prices and economic optimism filters through and leads to market exuberance. Over time however the market will mature and investment will become more long term in nature and become based on price versus earnings and company and sector research.” In order to meet the demand of this new breed of investors Saudi brokerage companies have invested heavily in their trading platforms and research thinks Adeeb Al-Sowalim, chief executive officer (CEO) at Saudi investment bank Falcom. “We introduced ‘Falcom Watch’ for this very reason. It provides a wide variety of financial analytical tools to manage the forecast process and monitor the overall performance of the Saudi stock market. This is backed by two research teams one for our own growing asset management business and one producing external research reports. All of this is then supported by our trading platform which allows complex trades across multiple markets.” John Coverdale managing director at SABB thinks that a more sophisticated and mature approach is inevitable. “As part of a wider group we are uniquely placed to help investors in the Saudi market. We have experience of trading in markets all over the world and this has allowed us to develop a new trading platform which not only utilises this knowledge and experience but also takes into account the specific nature of the Saudi stock market.” He believes that this combination of global best practice such as company research and first class settlement combined with a specifically created platform specifically designed for the bank meets this need. Ultimately however, Coverdale would like to see much more of a balance between investing directly in the stock market and the use of longer term products such as mutual funds. “We offer a large number of investment products. Domestic funds are managed by our asset management team at HSBC Saudi Arabia while others

John Coverdale, managing director at SABB thinks that a more sophisticated and mature approach is inevitable.“As part of a wider group we are uniquely placed to help investors in the Saudi market. We have experience of trading in markets all over the world and this has allowed us to develop a new trading platform which not only utilises this knowledge and experience but also takes into account the specific nature of the Saudi stock market.” He believes that this combination of global best practice such as company research and first class settlement combined with a specifically created platform specifically designed for the bank meets this need. Photograph kindly supplied by SABB, February 2008

are given international exposure and are managed on our behalf by HSBC Group overseas. This combination of local knowledge with international expertise is already attracting international investors, who cannot invest directly in the Saudi market. For retail investors, of course, mutual funds offer perhaps the best approach for those wanting to invest in the Saudi market for the longer term.” In the meantime Saudi investors unwilling to commit to mutual funds but who still want to spread their risk may well be drawn to exchange trade funds (ETFs). “We are hopeful that the Capital Markets Authority (CMA) will pass the necessary regulations soon so that we can launch a number of ETFs that we have planned,” explains Al-Sowalim who believes that as well as demand for an ETF that will track the Tasi, which will be based on freefloat from April, there is also a market for more specialist products. “We think there will be interest in sector specific ETFs such as those based on Saudi bank stocks but also Shari’a compliant products which would only invest in say Islamic financial institutions for example.” He thinks that high levels of liquidity and the ability to withdraw money simply through trading will appeal to investors more used to direct investment.

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2 3 2 1

2 1

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2004 3 NCCI 2 Ettihad Etisalat (Mobily) 1 Sahara Petrochemical Co

21 December 2004 16 October 2004 17-May-04

1,435,000,000 1,000,000,000 300,000,000

382,666,667 266,666,667 80,000,000 729,333,333

2003 1 Saudi Telecom

January-04

15,300,000,000

4,080,000,000 4,080,000,000

* Date: Last day of Retail Subscription Period. Source: HSBC

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Stock Exchange Report SGX: REVAMPING THE ST INDEX

Photograph © Oksanaphotos; supplied by Dreamstime.com, February 2008.

The expanding world of SGX Singapore Press Holdings (SPH), Singapore Exchange (SGX) and FTSE Group have collaborated to revamp and upgrade the Straits Times Index (STI), the market’s key benchmark. At the same time, the partners have launched 18 new FTSE ST Index Series market indices that include another four benchmarks, a China-themed index and 13 industry indices, based on the Industry Classification Benchmark (ICB) system. This major alignment of Singapore’s index system to an international index system will result in a marked increase in SGX’s universe of investable stocks. The moves take place in a wider context of SGX’s efforts to upgrade services on the exchange, the introduction of new listings rules and the transformation of SESDAQ, a special platform for growth companies, into Catalist, a sponsor-supervised listing platform for high growth local and international companies. MAJOR OVERHAUL of the Straits Times Index (STI), Singapore’s key benchmark index, coupled with the establishment of 18 new FTSE ST Index Series market indices, will more closely reflect “the current stage of development of the Singapore marketplace,” notes Lai Kok Leong, vice president and head of data services at SGX. “In the past we have introduced incremental changes to the index system through experience and domestic statistical standards. That worked well in the past when indices were used only as a guide/barometer for the economic health of the sectors. But nowadays

indices are used by money managers/investors for performance attribution analysis and funds allocations. So we decided to improve the STI as well as create a more comprehensive set of indices for investors,” he adds. The upgrading of the STI and unveiling of the FTSE ST Index Series market indices has involved a major rethink about the proper allocation of stocks within the new indices. Up to now, for instance, the benchmark STI comprised 47 stocks. The revamped STI now “represents a highlyinvestible set of SGX-listed large cap stocks,”explains Lai, covering 30 of the exchange’s largest qualified stocks

with a market capitalisation ranging from $4.3bn to $58bn. Some 16 stocks out of the original 47 have been moved to the FTSE ST Mid Cap Index, while another three stocks have joined the FTSE ST Small Cap Index: these are Creative, Datacraft and Jurong Tech. Lai notes that “coincidentally, all three are in the technology sector, pointing perhaps to the relative weak valuation of technology companies at the time when the indices were constructed.” Two stocks (Jardine Matheson and Total Access Communication) were removed from the indices entirely and four new stocks were introduced into the revamped STI benchmark index SIA Engineering, Yanlord, Yangzijiang and Wilmar. This diversification in the FTSE ST Index Series will encourage “the development of further investible products, based on clearly defined indices, such as FTSE ST Mid Cap or FTSE ST China based exchange traded funds (ETFs) or structured products,” adds Lai. “The key changes have been entirely focused on meeting investor requirements; for example, the stocks in the benchmark indices have to be liquid for trading purposes. That message was very clear from the market feedback. The partners made a good judgement call that the new STI is to become the blue-chip index instead of trying to be a very broad-based index that favours stock representation from all sectors at the expense of liquidity and trading cost efficiency. What remains in the STI are truly the largest stocks. The response was very positive because of the clarity and efficiency that the new STI offered.” The FTSE ST Mid Cap Index consists of 50 stocks. At inception, the stocks have a market capitalisation ranging from S$1.2bn to S$4.3bn, of which 16 came from the old STI: these 16 comprise some 46% of the FTSE ST Mid Cap Index’s weighting. According to Lai,“this particular index has a good mix of growth and

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dividend stocks with no one sector dominating.” However, unlike the main benchmark and the FTSE ST Mid Cap Index, the number of companies included in the new FTSE ST Small Cap Index is not fixed and some 193 companies are currently categorised in this index. The make up of this small cap index is essentially based on those stocks that meet FTSE’s investibility criteria, less STI and mid cap stocks. The FTSE ST All-Share Index, the last of the four benchmark indices, comprises all the component stocks in the revamped STI, FTSE ST Mid Cap and FTSE ST Small Cap indices, giving some 273 investment grade stocks, and represents some 98% of the market capitalisation of the SGX Mainboard. The remaining 2% is represented in the FTSE ST Fledgling Index, which has 222 companies that are free float adjusted but which are not screened for liquidity. At the same time, the FTSE ST All-Share Index forms the basis of ten ICB-based industry indices, including oil and gas, industrials, consumer goods, telecoms, utilities and financials. Additionally there are three ICB-based sector and sub sector indices in the new family, covering real estate, real estate holdings and development and real estate investment trusts (REITs). “These indices are timely. In Singapore, property redevelopment and tourism initiatives are taking shape at a fast pace. Events such as Formula 1 will be held here from 2008 onwards and integrated resorts are being developed in the central financial district as well as the nearby Sentosa resort island. All these have implications on the valuations of the companies in the real estate and hospitality sector. Investors are also looking for opportunities on how to participate in the industry growth. The international index methodology and liquidity standards will provide investors the quality

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benchmarks and the confidence to invest in the marketplace,” notes Lai, who points out that Singapore is the second largest REITs market in Asia, after Japan. Illustrating the changing dynamics of regional listings, Singapore’s new index family also includes the first China-themed index to be made available by the exchange, which is “designed to help investors monitor and participate in the China growth story through Chinese firms listed on the exchange,” explains Lai, adding that it also “is designed to provide Chinese Qualified Domestic Institutional Investors (QDII) funds the familiarity of home-based companies when they start to invest in the Singapore market.” Currently, 50 out of the 134 mainland Chinese companies listed on SGX are included in the index.“Each of them has at least 30% of its shares owned by the mainland Chinese government or nationals, either directly or indirectly,” says Lai. “This is our first thematic index to date. Because of the stringent selection criteria, the index again is good for ETFs and over the counter products.” What is clear is that SGX is cascading a series of liquidity enhancing initiatives through from the Mainboard down to Catalist, again a revamp, this time of its SESDAQ platform for high growth stocks, which essentially acts as a second board. Catalist is a sponsor supervised listing platform that emerged from a public consultation exercise begun in May last year. “Centred in Asia, Catalist will primarily, but by no means exclusively serve Asian companies and investors,” says Lawrence Wong, SGX executive vice president and head of listings: a move which he adds is in line with Singapore’s desire to establish itself as a key Asian financial hub. Catalist is also the result of

FTSE GLOBAL MARKETS • MARCH/APRIL 2008

SGX’s efforts to streamline listing procedures and introduce further efficiencies into the exchange. Catalist allows a sponsor, “such as a Deutsche Bank, Macquarie or Societe Generale,” says Wong, “to determine the suitability of a high growth company on the exchange and perform the appropriate due diligence on the firm prior to a listing, without SGX having to review the admission of the company. In this regard, the rules and processes for secondary fundraising and business expansion have also been taken into account to help meet today’s requirements for high growth companies,” says Wong as Catalist’s regulatory regime offers “a much faster, simpler way for these firms to raise capital. The annual limit on the issue of additional shares on the secondary board, and thresholds for acquisitions and disposals of assets that do not require shareholder approval have been raised which, says Wong,“will facilitate the development of high growth companies.” The exchange’s focus on quality listings remains, stresses Wong, with the retention of key safeguards for investors and, of course, the stringent qualifications in place for sponsors.” SGX has established a formal pool of acceptable sponsors and will apply stringent application criteria as this pool expands over the coming years. Firms which were already listed on SESDAQ now have a minimum of two years from the announcement of Catalist sponsors (on 5 February 2008) where their listing is still governed by pre-Catalist rules and over which time they are expected to find a suitable sponsor to enable them to enter the new regime. Companies on the new board must retain a sponsor at all times, and sponsors are specifically responsible for assisting the company with compliance with exchange rules including, for instance, company circulars.

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Corp A

Stock Exchange Report THE CME & NYMEX: THE TUSSLE FOR GLOBAL DOMINANCE IN DERIVATIVES TRADING

(around half) of Nymex HE CHICAGO trades are conducted via M E R CA N T I L E CME’s Globex platform. EXCHANGE’S If the deal with the (CME’S) $11.3bn cash Nymex goes through and shares offer for New unimpeded, and you York Mercantile add to that DME mix Exchange, though long the commodity strength anticipated, has brought that the CME now into focus the need or offers having absorbed otherwise of a superthe Chicago Board of derivatives exchange Trade; plus the role that with a global span. Both Nymex played in the exchanges are now in establishment of The exclusive 30-day talks Green Exchange (see and insiders say they are box) and the CME close to reaching © Photographer Staysis Eideijus/Agency: Dreamstime, supplied February 2008. suddenly becomes one agreement. The US of the strongest key Department of Justice With infinite complacency men go to and fro over this commodity players, will likely to examine globe about their affairs, serene in their assurance of green or otherwise, on the deal; though market their empire over matter. It is possible that the the planet. commentators say that infusoria under the microscope do the same. Few have For the CME itself, the transaction is given thought to the new world of derivatives the advantages of unlikely to face any exchanges as a source of human power: or thought of consolidation on this serious regulatory them only to dismiss their business as a pastime of scale and with this hurdles because of the arcane trading practices. Most mainstream exchanges particular set of relative lack of overlap have fancied there might be other men in the financial relationships up are between products arena, perhaps inferior to themselves and ready to obvious: reducing traded on both welcome a missionary enterprise. Yet across the gulf of integration risk and also exchanges. While US space, intellects vast and cool and unsympathetic, raising an additional commentators bat to regard this earth with envious eyes, and slowly and barrier against any and fro about broker surely have drawn their plans for domination. countermove by its relationships and the Francesca Carnevale (with apologies to HG Wells) competitors. domestic repercussions draws a few shapes of things to come. What is interesting is of the bid, make no mistake. The CME’s move to consolidate the highest level of open interest in its that after what has been a challenging with the Nymex has global benchmark Oman Crude Oil Futures year with the wholesale integration of repercussions across a slew of Contract, the emerging benchmark for the CBOT into the merged group, the pricing the GCC region’s crude oil. To CME shows no sign of let up: going commodity and financial derivatives. For one, buying Nymex will give the date, the exchange’s benchmark has gung ho simultaneously for the Nymex CME a share in the Dubai Mercantile traded a total of 245,185 contracts, and emerging markets exchanges, such Exchange Limited (DME), a joint equivalent to just under 245.2m as Bursa Malaysia. In this regard, the venture between Tatweer, a member barrels of oil, and has been actively CME is underscoring what is becoming of Dubai Holding, and Nymex. The traded as far out as February 2010. an increasingly popular trend: the importance of the stake cannot be Not bad for an exchange which only building of small stakes in emerging market exchanges by the industry's underestimated. The DME is highly launched in June last year. Moreover, the DME continues to large players. Every action, however, profitable, and looks set for another bull run in 2008. In mid-February, the develop its global customer base and has an equal and opposite reaction. We DME announced in a strong start to attract new participants and members. know so, because Newton told us so. 2008 trading with the setting of a new The DME already uses the Nymex The experience of OMX Group has monthly volume record—achieving platform and a substantial element provided a Newtonian template of

THE GLOBAL SHAPING OF THE CME

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

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THE FTSE I WANT SHARIAH COMPLIANT INVESTMENT INDEX FTSE. It’s how the world says index. Islamic investment is growing at a fast pace, with increasing demand for ways to invest solely in Shariah screened and compliant companies. To stay ahead, we understand that you need a comprehensive and Shariah compliant index solution. Based on the FTSE Global Equity Index Series, FTSE has created the FTSE Shariah Global Equity Index Series, a new series screened to comprise only Shariah compliant stocks, providing solutions that will always be in line with Islamic investors’ needs. www.ftse.com/shariah

© FTSE International Limited (‘FTSE’) 2008. All rights reserved. FTSE ® is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE under licence.

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Stock Exchange Report THE CME & NYMEX: THE TUSSLE FOR GLOBAL DOMINANCE IN DERIVATIVES TRADING

sorts, with its link up with Bourse Dubai’s global aspirations. HSBC Holding Plc, the Bank of Tokyo and Emirates NBD will begin raising $4.2bn to fund Borse Dubai's $4.9bn deal in the third week of February. Syndicated in London, Hong Kong and Dubai, it will likely be oversubscribed and is expected to close by month end. Either way, The CME and Borse Dubai’s moves are a strong suggestion that the coming battlegrounds for competitive acquisitions will be in the fast moving markets of Asia and Latin America—excepting perhaps still highly nationalistic markets such as China and India that will strongly resist any foreign shareholding in their national exchanges which are still deemed strategic assets. Much now depends on the ability of the CME to close the deal quickly. The exchange has shown in its acquisition of the CBOT that it can easily squat away annoying competitive counterbids. It has also demonstrated its political clout

in a Republican administration which will remain in place for most of 2008: a factor which plays to the CME’s advantage. Given that the deal will go ahead largely unimpeded, the CME’s aspirations might be dented at home by what looks to be some groundswell among the broking community that might temporarily drive some liquidity elsewhere: but most likely that is more smoke than fire. That smoke is coming from some of the 816 Nymex members who hold “ClassB”shares, entitling them to 10% of trading revenues if more than 90% of volumes trade electronically. The CME wants to buy them out for $500m, but at least some members are thought likely to argue this does not compensate them adequately for the loss of longterm revenues. It is a sensitive issue which, if not handled correctly, could bolster the development of a competitor and drive some liquidity away; it might even coalesce moves by a group of investment banks and trading firms to form a viable alternative. Unlikely, but

ENVIRONMENTALLY FRIENDLY DERIVATIVES THE GREEN EXCHANGE is a partnership between NYMEX and Evolution Markets, the environmental brokerage, and will include major energy and environmental commodity trading houses Morgan Stanley, Credit Suisse, JPMorgan, ICAP and Tudor Investment Corp, Constellation Energy. Headquartered in New York and with offices in London and Continental Europe, The Green Exchange is a standalone corporation that will be directly linked to the CME Globex® electronic trading platform, where NYMEX contracts are traded. In addition, trades will clear through the NYMEX clearinghouse, and transactions can be margined across The Green Exchange environmental product offerings and the NYMEX energy complex. Green Exchange contracts will begin trading during the first quarter of 2008, using the NYMEX trading and clearing platforms. The new exchange will come under the regulation of the CFTC and is expected to launch as an entity during the first quarter of 2009. The exchange will enable investors to

it might. Competitive responses from exchanges such as NYSE Euronext also look likely to be tempered. NYSE Euronext, has recently replaced its chief executive and the new incumbent is occupied with taking over the American Stock Exchange. Then again, if the deal goes through unimpeded, it might also give the CME an opportunity to take a sideswipe at the Intercontinental Exchange (ICE), which forced the CME to pay a tad more for the CBOT than it had really wanted to after ICE made a counteroffer for the exchange. With Nymex under its roof, the CME would pit itself in direct competition with ICE. However, ICE now has acquisition troubles of its own as reportedly its plans to merge with the newly proposed Project Four Seasons venture has come under attack from an anonymous counter bidder. It looks like competition in the US exchange landscape is set to become ferocious in 2008.

trade futures, options and swaps in so-called ‘green’ markets, such as wind and solar power, biofuels and reforestation projects. Initially it will trade contracts such as carbon credits included in the UN Clean Development Mechanism (CDM), voluntary emission reduction credits and carbon allowances from the European Emissions Trading Scheme (ETS). The move to establish a environmentally supportive derivatives exchange highlights the extent to which complex financial instruments are rapidly emerging alongside the simple buy and sell trading that has characterised carbon markets up to now. The Green Exchange will offer a new and profitable way for institutional investors and traders to become involved with the fast-growing carbon market: which some analysts say will be worth some $3trn within the next five years. Evolution Markets president and chief executive Andrew Ertel said in an official release that "Leveraging financial markets is an essential part of addressing environmental challenges and The Green Exchange is the right financial marketplace at the right time."

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Stock Exchange Report BRAZIL IN STEP WITH ARGENTINA

INVESTORS STILL OPT FOR BOVESPA Photograph © Sebastian Kaulitzki; supplied by Dreamstime.com, February 2008.

The Brazil and Argentina stock markets have fallen in step this year, blurring last year’s trend for outperformance from Brazil’s Bovespa and weakness in Argentina’s Merval indices. In spite of Brazil’s long bull run and Argentina’s bearish performance and the recent weakness of Bovespa, investors continue to be much more overweight in Brazil and are still neutral to pessimistic on Argentina. Last year, they were ploughing into the São Paulo exchange on the back of the country’s sensible economic policies, liquid and well-run markets and improving growth prospects, while whacky economic policy and lack of market liquidity relegated Buenos Aires to the sidelines. Those trends are set to continue. John Rumsey reports. RAZILIAN EQUITY MARKETS look set to continue to eclipse Argentina Equity performance could hardly have been more different between the rivals and neighbours last year. While Brazil yielded the second best results in dollar terms ending up 74.1% Argentina languished as the second worst, down 6.2%. By February 11th this year, the Merval was down a further 5.92% and the Bovespa had succumbed to weaker market conditions, falling 4.8% in local currency terms. Last year’s performance may appear surprising at first. After all, both countries are commodity driven and have big agro-sectors that should benefit from the current emphasis on metals, mining and foodstuffs. And Argentina has been recording substantially higher GDP growth than Brazil. Argentina grew 7.5% last year and is expected to grow 5.5% this year

whereas Brazil grew 4.4% last year and is expected to grow 4% this year, according to the International Monetary Fund (IMF). The differential is first and foremost the country’s policies, both in capital markets and in the wider economy. For Argentina, investors like to cite the toxic mix of a pre-election splurge that damaged earlier sensible fiscal policy and negative real interest rates which have kept the currency artificially low against the dollar. Coupled with the consumer boom, that has led inflation to surge. To make matters worse, the government started cooking the books to try and disguise the inflationary mess. Indec, Argentina’s national statistics agency, reported inflation of 8.5% last year, well below the estimate of economists who say the cost of living is rising at about 20% per annum. Price caps have continued to play an important role in

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inflation too applying to basic staples such as milk. Argentina has poor fiscal policy, no monetary policy to speak of and the government is sticking to arbitrary measures of inflation, believes Scott Piper, executive director and portfolio manager for Morgan Stanley Investment Management’s Latin American equity portfolio. With increases in government expenditure of 50% last year, it is no wonder the country has struggled to attract investment, he says. Economic policy since the crisis has been disappointing for international investors, agrees Jules Mort, Latin American fund manager at Threadneedle in London. Government blundering can be seen in everything from controls on electricity prices, high inflation and the subsequent meddling with inflation numbers. Everyone knew the Argentine crisis was coming.

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Stock Exchange Report BRAZIL IN STEP WITH ARGENTINA

It was just a question of time, he says. The election of Cristina Kirchner in October represented a ray of hope. Investors felt that her populist electioneering was just that. For many, the illusion that the new Kirchner would implement change was brief. As well as disappointing investors by continuing with broad macroeconomic policies and failing to change key ministers, Kirchner has been slow to deal with pressing issues. A new USstyle core inflation measurement was meant to have been brought in at the start of this year to help Argentina renegotiate its $6.3bn debt with Paris Club creditors, but the launch has been delayed. The energy crisis has worsened with regular black-outs. That crisis has had a long gestation through subsidised prices and a lack of investment in productive capacity. Mort believes the feeble response to the energy crisis, consisting of giving out energy saving light bulbs and changing the clock by an hour, is telling. There are some signs that Cristina Kirchner is more orthodox on the fiscal side, he believes, pointing to increased taxes on luxury cars and the abolishing of VAT reimbursement on credit cards together with increased taxes on exports. Moreover, Argentina has a cushion from external shocks in the shape of record $47bn in central bank reserves. Paulo Leme, director of emerging markets research at Goldman Sachs, says that confidence that Kirchner might implement change has not completely evaporated although decisions and appointments in the first months of her administration suggest a strong degree of continuity. The contrast with Brazil could hardly be greater. The re-election of President Luiz Inácio Lula da Silva in 2006 meant continued policies of macroeconomic stability. Hawkish monetary policy, with only gradual cuts in interest rates, has

controlled inflation and driven up the currency, which proved one of the best performing against the US dollar last year, posting gains of 20%. That same monetary policy has kept GDP growth rates subdued, but growth has recently been accelerating on the back of a consumer boom thanks to more credit as rates and spreads have come steadily down. The trend in Brazil, unlike Argentina then, is for accelerating GDP growth. Meanwhile, reserves have topped $180bn offering a strong cushion against market turbulence. It is not only macroeconomic policies that deter investors from Argentina, but capital controls that make life more difficult. For Piper, these have proved one of the most significant deterrents. The firm, which manages about $5bn in dedicated assets in Latin America has its largest overweight in Brazil and is underweight to neutral in Argentina. Not only do its Brazilian holdings dwarf those of Argentina in real terms and in weighting, but its largest holding, Tenaris, is a global pipe producer that happens to be headquartered in Argentina, says Piper, meaning that the firm has no exposure to the domestic economy whatsoever. From an investor perspective, capital controls are a roadblock right from the word go, Piper says. Argentine stocks are not liquid and capital controls make local market investing doubly undesirable. Mort, whose Threadneedle has some $3.5bn in Latin America equities, says that Brazil represents 67% of the portfolio and Argentina just 1%. The small size of the Argentine markets has turned investors off in a global environment that prized liquidity, he notes. He too has no direct exposure to the economy and hasn’t for some eight years. It is not only the macro economy and capital restrictions but the composition

of the market, with its lack of commodity-oriented companies, and a lack of liquidity, Mort says. Over 50% of the Merval index is related to one company, pipe producer Tenaris. Its acquisition of North American Maverick Tube Corporation last year came at a time of rising costs and lower pricing power and Tenaris provided mediocre performance as a result, he says. At the same time, low trading volumes on the Merval exchange last year counted against the Buenos Aires exchange as investors sought to reposition portfolios away from riskier assets as the economic downturn kicked in. That led to a significant premium on liquid stocks and markets worldwide. While Argentina’s exchange remained moribund, in Brazil, meanwhile, equity markets are liquid and growing fast. Indeed, Brazil produced the third largest number of IPOs in the world last year with companies raising $32bn through 66 initial public offerings. The continuing love affair with the BRIC markets has also pulled in cash to Brazilian markets. Commodity stocks, which still dominate the São Paulo market, have fared particularly well. That is seen in oil giant Petrobras, which found significant new oil discoveries and managed to increase production some 10% last year, and mining conglomerate Vale, which is enjoying 30% plus price increase in iron ore in 2008, points out Mort. Still, performance in the market has been decidedly lumpy, with smaller-cap shares lagging in the global stampede to liquidity. Of the IPO crop last year, 70% have trailed the main Bovespa index and 50% are below their own IPO price. The shake-out is healthy, say fund managers, who are focusing on blue chips. The economic track of Brazil and Argentina continues to look divergent as Brazil consolidates its lead particularly in markets and liquidity.

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Country Report

LOOKING FOR EFFICIENT REVENUE Will 2008 mark a watershed for the growing power of Russia’s energy sector? Flush with petrodollars and an energy industry requiring massive investment to operate at peak levels, Russia has so far made all the running in determining participation and the limits of foreign investment in its strategic energy sector. However, as Russia’s energy sector continues to consolidate and require more investment dollars and China continues to establish new oil and energy supply infrastructure with CIS states, will Russia have to re-examine its approaches to its extant energy programme? Simon Watkins reports.

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RUSSIAN ENERGY: A POSITIVE PRICE OUTLOOK

Russian first deputy prime minister, Dmitry Medvedev, president Vladimir Putin’s preferred successor in the March 2008 presidential elections, examines a diamond as he visits a diamond sorting center of Russia’s state diamond monopoly Alrosa in the city of Mirny in the Siberian region of Yakutia, Russia, Wednesday, February 6th 2008. Photograph by Dmitry Astakhov, supplied by AP Photo/PA Photos, February 2008.

CCORDING TO UNICREDIT’s oil and gas team, Russia’s oilfield services (OFS) industry will boom this year, and continue to grow strongly in the medium term. The team thinks drilling activity will increase at an annual compound growth rate of 27% to 2011, as crude oil prices remain high and Russia moves its drilling eastwards. “Increased drilling activity, resulting from a shift from the depleted core producing fields in western Siberia to new regions in eastern Siberia and the Timan-Pechora region will spur the OFS industry’s growth,” the team says. In fact, Eastern Siberia, which has harsher weather than its western counterpart, costs five times more per metre to drill, at an average of $1,900. The increasing use of more advanced equipment and technology, along with the market’s need for new drilling units, are also behind Russia’s pending OFS boom, the team adds, explaining that Russia’s OFS industry is highly fragmented and underdeveloped, providing plenty of room for consolidation, which would also strengthen the sector. The dichotomy seems to find further resonance in the experiences of Lukoil, Russia’s largest private oil producer. The firm’s full-year profit rose by at least 7% for 2007 as a whole, boosted by broadly higher fuel prices. Then again, although Lukoil did refine more oil to benefit from rising fuel oil and gasoline prices—and to counter Russia’s crude export and extraction taxes—its total crude and gas output increased only 1.6% over last year, and oil production growth of 1.4% lagged behind the 2.4% gain in Russia as a whole. “Lukoil wants to maintain production growth at 6.7% a year through 2016, mainly by developing its gas business,” explains Sam Barden, head of SBI Fund Management, “but output growth last year was year was

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Country Report RUSSIAN ENERGY: A POSITIVE PRICE OUTLOOK

stymied by its sale of Caspian trading and emission taxes around the Medvedev, that Russia is finally ready to Investments Resources and Gazprom world actually get going, as Al Gore consider greater foreign participation in [the state natural-gas export would like, Russia is going to be hit oil and gas projects, including on its monopoly] took less fuel as a relatively between the eyes with this [sic]. While continental shelf. “We are an energy warm winter left its storage facilities Russia has the projects and the power and must think about the future. full.” Nonetheless, Lukoil plans to technology to upgrade, it does not yet We must invest funds into this sphere. invest around $11bn in 2008, according have the money, or the co-ordination to We have our own funds, but we are ready to discuss these issues with to Lukoil’s CEO, Vagit Alekperov, accomplish them.” All of this, despite the added impetus foreign investors,” says Medvedev, who including both capital spending and acquisitions. However, it remains gained in December of last year with is likely to be elected Russian president unclear as to precisely how the firm will the statement from the CPC that it in March having been endorsed last increase the uptake of oil from its wants to double its capacity to ship month by President Vladimir Putin as existing wells, which have for years more crude from Kazakhstan, where his favoured successor. However, production is rising, although Russia Medvedev also signalled that on energy been drilled in an efficient fashion. issues the country’s Indeed, lack of investment leadership would like to in ensuring the stability of retain the right to make all supply was illustrated in the key decisions itself. middle of January with Lukoil plans to invest around $11bn in Medvedev’s statements Russian pipeline monopoly, follow comments in late Transneft, halting Russian oil 2008, according to Lukoil’s CEO, Vagit December from Russia’s flows via the Caspian Alekperov, including both capital spending Natural Resources Pipeline (CPC), which ships and acquisitions. However, it remains Ministry that six major mainly Kazakh crude, citing unclear as to precisely how the firm will investment projects, being maintenance work at a rail increase the uptake of oil from its implemented on the basis loading terminal, according existing wells, which have for years been of tenders, could attract to industry sources. CPC R800bn ($32.5bn) in ships crude from drilled in an efficient fashion. funding for investment Kazakhstan to Russia’s Black projects. As a corollary of Sea port of Novorossiysk, this, says Naheem Majid, but also uses flows of head of Sinaco Global Russian crude which travel a short distance between the Transneft had long opposed the idea on the basis Trading, the ministry has worked out a network and CPC by rail. “With the that it would put additional pressure on number of amendments to a bill on oil, congested Turkish straits. gas and mining, which will determine a users of the CPC including Rosneft, the TNKBP, Rosneft, and Surgut, you would Nonetheless, Kazakhstan’s President, procedure for drawing up lists of have thought that something could Nursultan Nazarbayev, said in deposits to be offered for development have been done earlier to avoid this December that Russia had lifted its as part of investment tenders. “The bill situation,” highlights Barden, “and it is opposition to the idea after the CPC sets out criteria and procedures for symptomatic of the wider problems in pledged to join the Burgas- classifying deposits as strategic,” he Russia’s oil industry.” He adds that Alexandroupolis pipeline, a trans- says, adding that these will include oil Transneft and the CPC are not Balkan link to take Russian and Central fields with reserves of more than 70m connected, so the Russian crude must Asian oil from Bulgaria to Greece, thus metric tons (513m bbl), natural gas deposits with over 50bn cubic metres, be onloaded in Tikhoretsk and shipped bypassing the Bosphorus. All of which bodes well for foreign gold deposits with more than 50 metric by rail to Kropotkin, where it is loaded into the CPC. “IfRussia wants to remain investment projects in the sector, it tons, copper deposits with over 500,000 competitive in energy, the efficiency would appear. This consideration has metric tons, and all continental shelf and structural investment needed over taken on a particular significance given deposits. “Foreign interest in the Russian oil the next 20 years will be staggering, and the comments in January by first deputy can only be supported by international prime minister and chairman of the sector is being stimulated by rising oil investment,” he highlights. “If carbon board of energy giant Gazprom, Dmitry prices, of course, and peaked in 2003

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when TNK and BP announced their joint venture, and since then there has been a continuing stream of new investment,”says Bill Page, tax and legal partner, oil and gas, Deloitte, Moscow. “At the same time, though, there has been a perception of increasing political intervention, for, example with the Yukos affair and the recent controversy over the Sakhalin 2 project.” Nonetheless, he goes on, “Conventional oil reserves in political stable locations—such as the US or UK—are in irreversible decline, and the rapid emergence of China and India as major oil consumers will almost certainly continue and, baring a catastrophic global recession, he can see continuing upward pressure on oil prices over the next decade and increasing pressure on supply. “This creates an environment in which hydrocarbon sources which were previously uneconomic, such as Canada’s oil sands; or unattractive because of perceived political risks, such as the former USSR, become the focus attention for the energy industry. These become even more important if one doubts the ability of major OPEC producers, particularly Saudi Arabia, to fill the widening gap between supply and demand.” In this context, he says, offshore exploration and production is still in its relatively early stages, and operations in the Barents Sea or offshore Sakhalin are regularly hampered by storms and seriously restricted for up to half the year because of thick ice cover. While infrastructure may be welldeveloped in the mature producing regions of western Siberia and the Volga-Urals basin, in the promising areas of Sakhalin, the Barents Sea and eastern Siberia, only the largest prospects are economic because of the huge cost of developing infrastructure from scratch. Projects which would be major finds in the Central North Sea or

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Lack of investment in ensuring the stability of supply was illustrated in the middle of January with Russian pipeline monopoly, Transneft, halting Russian oil flows via the Caspian Pipeline (CPC), which ships mainly Kazakh crude, citing maintenance work at a rail loading terminal, according to industry sources. CPC ships crude from Kazakhstan to Russia’s Black Sea port of Novorossiysk, but also uses flows of Russian crude which travel a short distance between the Transneft network and CPC by rail. The petroleum port of Vladivostok on Russia’s eastern seaboard. Photograph © Maxim Tupikov, supplied by photography agency Dreamstime.com, February 2008.

in Kuwait may be simply too small to justify the level of investments required. Nonetheless, although the Yukos and Sakhalin-2 disputes have tended to attract more publicity, there have been several major successes for foreign investors in the Russian oil and gas sector over the last few years. The poster boy for foreign investment in the oil and gas sector in Russia has clearly been TNK-BP. Despite a torrid time with its Sidanco investment in the late 1990s, BP took the dramatic step in 2003 of burying the hatchet with its former adversaries and setting up a 50-50 joint venture with TNK. The resulting blending of international and domestic expertise has generated benefits for all stakeholders. As a consequence, a group of foreign investors are looking for routes to enter the Russian market, according to Page. For example, the upstream arm of RWE was recently reported to be looking at a major gas project. Meanwhile, Repsol YPF and PetroCanada are also reported to be

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considering gas and liquefied natural gas (LNG) options. Remember also that Hungarian MOL is already active in Russian upstream, as is Wintershall; while Italy’s Eni is reported to be in the process of negotiating a joint venture with the mighty Gazprom. “With the continued slowing rate of increase in Russian oil production, the government only last year introduced taxation reforms that will significantly reduce the tax burden on mature and heavy oil fields, and which provide tax holidays to companies developing new projects in parts of eastern Siberia” concludes Page. “The objective is to encourage exploitation of assets which the current Mineral Extraction Tax (MET) regime renders uneconomic because of its regressive nature.” Overall, Deloitte research suggests that the total gross value of the relief granted to companies operating these assets could run to tens of billions of dollars and among the beneficiaries will be companies with significant foreign participation, such as TNK-BP.

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THE COMPLEX MAZE OF CUSTODY Demand for OTC derivatives continues to blaze a path of opportunity for domestic custody players. However, the complex solutions needed to support these and other emerging asset classes have in many instances prompted a major overhaul of outdated legacy systems. How are custodians dealing with this ongoing challenge? Dave Simons reports from Boston. T WAS NOT all that long ago that the processing of over the counter (OTC) derivatives on immature legacy systems required a fair share of hands-on intervention. “Straight through processing (STP) and OTC were words not often used in the same sentence,”notes Stephen Bruel, Tower Group analyst for Securities & Capital Markets. As the flow of derivatives activity became a torrent however, custodians quickly stepped up to the plate. As a consequence, the quest for comprehensive derivatives processing, trading and valuation solutions gradually began to take shape. Today, the ongoing revolution in faster and more cost-effective technologies—including nearly unlimited storage and infinite data processing capability— has helped make possible a wide range of functions that were unfeasible just a few short years ago. All of these initiatives, however, require a great deal of research and development; and a lot of dollars to boot.

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For every new opportunity there is a whole raft of possible complications. Moreover, as the number of traditional asset managers moving into complex instruments like derivatives, private equity and real estate increases, so too does the margin for error. Hence, the first order of business for custodians: building the kind of infrastructure capable of pulling together all the various pieces of data within the online informational mainframe, thereby allowing clients to see how everything interacts-and, most importantly, where the risk factors lie. “For instance, we now have the ability to collect underlying private-equity information that can show the individual investments within the limited partnerships,” says Bill Pryor, senior vice-president of product and technology solutions at Boston-based State Street, as well as head of the newly launched State Street Investment Analytics group.“That way, not only can you drill down to the lowest level of detail, you also have the ability to see across the entire spectrum of investments, covering both traditional and alternative asset classes.” All of which, of course, goes hand-in-hand with the ongoing revolution in faster and more cost-effective technologies. “There’s much more rigor on the purity of these calculation algorithms,” says Pryor. “We can now show performance measurement in one system starting at the total level, moving down through all the major asset classes, into the various sectors and countries right through to the security level. [That involves] calculating that on a daily basis and allowing the client to then link those security returns all the way back up, in order to come up with longer-time period returns.” To help offset the challenges of complex instruments like derivatives, JPMorgan has increased capacity and automation through the introduction of its Global Derivatives Servicing Hub, which handles all aspects of OTC derivatives from trade input, reconciliation to end-ofday valuation. “We have added more automated vendor choices to our valuation offering while at the same time striving to standardise the accounting treatment of these assets, always in keeping with industry best practice,” says Rajen Shah, global head of custody for JPMorgan Worldwide Securities Services (WSS). STP support remains a high-priority item among custodians, particularly as the number of clients using SWIFT’s standardised messaging system for trade settlement, asset servicing, and reporting continues to rise. “Customers want to know where the market is going from an STP perspective,“ adds Peter Cherecwich, head of institutional strategy and product development at Chicagobased Northern Trust, “because they realise if things are manual, there is a potential for error. Sure, it is very nonsexy stuff, but it is so important.” Because the various assets types each require a unique set of ISO message formats, another challenge for custodians is to bring together all the disparate elements into a single, easy-to-use messaging solution, says Shah. “Our goal at JPMorgan is to integrate the servicing of these

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Rajen Shah, global head of custody for JPMorgan Worldwide Securities Services (WSS), says: “We have added more automated vendor choices to our valuation offering while at the same time striving to standardise the accounting treatment of these assets, always in keeping with industry best practice.” STP support remains a high-priority item among custodians, particularly as the number of clients using SWIFT’s standardised messaging system for trade settlement, asset servicing, and reporting continues to rise. Photograph kindly supplied by JPMorgan, February 2008.

newer assets with more traditional asset classes and make it seamless to the clients, who are struggling with this same issue. Given our focus on investing in technology to improve quality and efficiency for our clients, we feel we can meet that demand.” Since 2005 JPMorgan has devoted nearly $2.2bn to its IT infrastructure, adds Shah, and will spend $600m annually in technology as part of the effort to enhance STP functionality. The company also offers Message Express, a service offered for JPMorgan clients who are not yet able to fully invest in standardised-messaging technology.

Streamlining the global marketplace The notion of immediacy, particularly as it relates to the increasingly accessible global marketplace, is one of the most compelling factors driving custodians’ business models at present. Very often, opportunities that present themselves overnight may no longer be available by the time the opening bell rings in New York.“Today you have asset managers who may be trying to hedge a position, or have a chance to minimise some losses, and in those situations, they really have to have their footprint positioned in such a way that they can really take

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“It is just not feasible anymore to have the American advantage of these unique global opportunities as they arise,” says Patrick Centanni, senior vice president of offering be different from the European offering,“ adds State Street's product and technology solutions team. Northern Trust’s Cherecwich. Establishing a single portal “So you begin to see this whole view of transactional across multiple geographic jurisdictions is therefore activity pretty much happening 24/7, all the way around another area in which custodians are attempting to harmonise the communications process. “Customers the world.” Domestic custodians have also worked to strengthen want magic to happen,” says Cherecwich. “They don’t ties with partners in emerging regions. Northern Trust want to have to deal with multiple sign-ons, for instance. recently unveiled a Simplified Chinese-language internet They want everything right in front of them, and, most of portal, giving Chinese institutional clients access to a all, they do not want to work too hard to get the wealth of information on their global custody portfolios information they’re looking for.” Because of the unconventional methods used in the using an indigenous website.“It taught us a lot about what processing and we need to change and reporting of today’s how to make those esoteric asset classes, it changes meaningful,” becomes increasingly says Geordan Capes of necessary for providers Northern Trust. to supplement their core “Internationalisation is For every new opportunity there is a custody accounting so critical, you have to whole raft of possible complications. records with a much make sure everything is more in-depth and designed from the Moreover, as the number of traditional informational package, ground up, keeping in asset managers moving into complex particularly as clients’ mind that you’re going instruments like derivatives, private equity investment strategies to be working in and real estate increases, so too does the grow increasingly multiple languages.” margin for error. Hence, the first order of sophisticated. Despite Incorporating a web improvements in design that accurately business for custodians: building the kind standardised messaging, reflects the personality of infrastructure capable of pulling a derivative trade of a particular region is together all the various pieces of data instruction from an key to this initiative, within the online informational mainframe, investment manager says Capes.“If you look thereby allowing clients to see how might arrive through at any Chinese website, everything interacts--and, most any one of a number of it looks nothing like mediums, from a basic ours. The point is, just importantly, where the risk factors lie. fax to an in-house databecause you have receiving tool. Hence, internationalised and the need for custodians altered the language such as The Bank of doesn’t necessarily New York Mellon to mean you have completely surrounded your client. That’s also part of what continue to act as consolidators of information; taking makes it challenging—you have to go a lot deeper once multiple data feeds and creating a “prime record” of information. Unlike in Europe, where multiple-market you get into that space,”he adds. variants have accelerated the need for modernisation in order to reduce the level of actuarial risk, the move towards One for all As customers continue to expand their reach into global automation and standardisation has, until fairly recently, been markets, increasingly they are seeking a single type of a much tougher sell in the United States. That, however, has platform to cover all their needs, no matter where their begun to change. “The industry now r recognises that it needs to move assets are under custody. The real “secret sauce,” according to Dan Wywoda, senior vice president and towards a standard means of receiving instructions,” says head of core products for BNY Mellon Asset Servicing, is Wywoda. “For instance, when taking instructions on the ability to bring all of the information together and interest-rate swaps, we are bringing them in via SWIFT as deliver it back to the client through a user-friendly FPML messaging. It is nice to see the evolution from a desktop tool. “Where you can click on a button labeled mainly manual means of instruction, to something like ‘counterparty exposure,’ for instance, then run that report SWIFT which is a well-established and widely accepted and have it tell you your derivatives versus marketable method. It is a good example of the industry admitting it securities. That is what they want—and why they are needs to move towards these kinds of universally accepted practices.” paying us to figure out all the mechanics.”

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ÂŠ 2008 Northern Trust Corporation. Northern Trust is authorised and regulated in the UK by the Financial Services Authority.

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Asset Management | Asset Servicing | Wealth Management

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In recognition of the rapidly evolving regulatory and risk environment, last year BNY Mellon introduced an outsourced OTC derivative valuation service for swaps and options used by institutional clients. Additional derivative-supporting services that include transaction processing, reporting, reference-data storage as well as risk and collateral management continue to drive the firm’s custody business model. “Collateral management offers the ability to take a derivatives transaction, and make sure the right amount of collateral has been set aside to support the change in value,” says Wywoda. “Exposure reporting has grown off of that as well, where clients want to know how many derivatives transactions they might have with a particular counter-party, or how much market risk is involved.” Asset managers using derivatives face increasing complexity on the cash-management side as well. The

SOLUTIONS TO THE RESCUE To support the growing volume of alternative products such as OTC derivatives and long/short (130/30) funds, custodians continue to streamline the trading process in an ongoing effort to provide accurate, independent and timely pricing of these complex instruments. Additionally, the expansion of the global markets compels providers to be able to process a greater portion of their business around the clock and in different geographic locations, while increased demands for accounting transparency only strengthen the case for the kind of leading-edge technological solutions that can help clients ratchet up their level of preparedness while improving operational efficiency. While some of their objectives may vary, domestic custodians are linked by a common goal: to get everyone on board the SWIFT bandwagon in order to promote the highest levels of STP across the transactional pipeline. For years, the need to maintain proprietary workstation technology meant that too many firms operated outside of the SWIFT space while continuing to process much of their business manually. Today, custodians are working to address these issues. A leader in the derivativesprocessing arena, Boston-based Brown Brothers Harriman (BBH) recently became one of the first service providers to exchange FpML (Financial products Markup Language) based contract notifications over SWIFTNet, as part of the ongoing effort to increase efficiency through automated OTC derivative post-trade processing. Andrew Tucker, partner and head of investor services Europe for BBH, admits that “it’s still a highly manual process

need to more actively manage cash and reconciliations in order to maintain sufficient margin levels while complying with the terms of Credit Support Annex (CSA) often results in increased fragmentation, making it harder to optimise cash while increasing operational risk. To offset these issues, clients of JPMorgan can utilise the company’s CommanD derivatives collateralmanagement business solution. “This allows clients to outsource the management of the CSAs by connecting our standard liquidity solutions to those accounts that support the OTC business while integrating cash across products to avoid adding fragmentation,” says JPMorgan’s Shah. JPMorgan WSS has been registering significant growth in the use of derivatives by its client base for some time. Of the clients served by its Global Derivatives Services business, which provides pricing, transaction management and accounting services, the

for the industry at the moment, which is precisely why we’re looking to help pioneer some of these efforts to bring STP into that equation." Their work appears to be paying off; at present, BBH’s core custody line boasts end-to-end STP rates in the low90% range and rising. To satisfy their customers’ need for timely access to key investment information, JPMorgan continually enhances its client-facing technology with the goal of maximizing both inbound and outbound automation, using browser-based tools as well as file-transfer interfaces. “From an inbound perspective, clients typically send file extracts from their systems for these new instrument types which we upload into our processing systems to maximize STP,” says JPMorgan’s Rajen Shah. Meanwhile, clients wishing to input OTC derivatives can use ACCESS, JPMorgan’s integrated browser-based portal platform for cash and securities, in order to get a full snapshot of all reports and more in-depth information. Achieving consistently high STP rates and standardized messaging is also a leading objective of independent providers like software-applications firm SunGard, which offers integrated asset-management and custody solutions through its Global Plus straight-through processing platform. While continued marketplace movement toward standardized messages and message content yields the most benefit to customers, the Global Plus system, featuring a comprehensive messaging backbone than can instantly process both inbound and outbound messages, helps clients deal with non-standardized messaging using multiple industry accepted formats (XML, SWIFT etc) as well as message interpretation

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number of open positions increased by 103% between 2005 and 2006. During the same period, for clients of JPMorgan’s OTC derivative collateral management service, CommanD, the number of CSAs executed increased by 144% according to a straw poll the bank undertook last year. That trend is still extant. Providing the best technology solutions is one thing-but clients also want a custody partner with the intellectual capital to help them understand their investments and make more informed investment decisions. Hence, providers such as JPMorgan also put a premium on consultative and forward-looking solutions in such areas as ex-ante risk management, investment manager analysis and peer grouping, as well as asset allocation and liability strategies. “In addition, clients are increasingly looking to understand the risks associated with their hedge fund investments or use of derivative instruments,”says Shah.

and transformation techniques. “The platform provides the flexibility institutions need to quickly and efficiently add both new instruments as well as older derivatives to their book of business,” says Maryanne Campbell, chief operating officer for SunGard’s Wealth Management division. Recognising the growing importance of the hedge-fund space, Chicago-based Northern Trust recently announced an alliance with financial applications company youDevise for the purpose of providing funds of hedge funds (FoHF) with daily portfolio management data including valuation, liquidity, performance and transaction history, using youDevise’s Hedge Information Provider 2.0 (HIP). “It has the look and feel of a Northern Trust offering, even though we’ve partnered for speed-to-market purposes,” says Peter Cherecwich, head of institutional strategy and product development at Northern Trust. “It is the kind of reporting that is necessary in order to keep pace with the expanding market for esoteric asset classes.” For its part, State Street seeks to provide its own customers with top-tier global performance, risk, analytics and compliance-services data through State Street Investment Analytics (SSIA), which consolidates the respective skills of State Street’s Analytics group with a team of partners including WM Performance Services, Elkins McSherry and the Private Edge Group. The company also continues to augment the services offered through my.statestreet.com, an integrated online customer information delivery platform that provides secure access to State Street's suite of market data and analysis applications.

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With more and more traditional clients infiltrating the potentially volatile world of alternative investments, today’s custodians fully understand their responsibilities and the long-term implications of this rapidly expanding marketplace. “I was reading a book the other day that listed all of these market events that the probability models tell you couldn’t happen in a 1000 years—and yet we’ve been pulling them off at least one per decade,” says State Street’s Centanni. “It really makes both asset owners and managers step back and say, ‘Okay, I did not quite see that one coming—what should we be doing now in terms of transparency and risk mitigation?’ The point is, before people just start blindly trading these advanced securities, they need to slow down and perhaps think about handling them a bit differently. And that is part of what we are here for.”

Andrew Tucker, partner and head of investor services Europe for BBH, admits that“it’s still a highly manual process for the industry at the moment, which is precisely why we’re looking to help pioneer some of these efforts to bring STP into that equation." Their work appears to be paying off; at present, BBH’s core custody line boasts end-to-end STP rates in the low-90 percent range and rising. Photograph kindly supplied by BBH, February 2008.

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THE FTSE GLOBAL MARKETS THOUGHT-LEADERSHIP

Roundtable TOWARDS 2020: CHALLENGE & OPPORTUNITY IN ASIA’S SECURITIES SERVICES MARKET

PANEL EXPERTS: From left to right:

Sponsored by

FRANCESCA CARNEVALE, editor, FTSE Global Markets ALASTAIR MURRAY, head of investment administration, Asia-Pacific, Institutional Fund Services, HSBC Securities Services ELIZABETH CHIA, managing director, head of securities services, DBS Bank Ltd MICHAIL FOSKOLOS, principal consultant, investment consulting, Mercer (Singapore) Pte Ltd LEOW CHONG JIN, head of Asia, BNY Mellon Asset Servicing JOHNNY HENG, director, Cornucopia Capital Partners Singapore Pte Ltd JOHN J DOYLE III, senior director, UOB Asset Management Ltd JEFFREY LEE CHAY KHIONG, managing director and chief investment officer, Phillip Capital Management (S) Ltd.

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ALASTAIR MURRAY: The key trend affecting our business

is the rapid growth of the fund management industry. I should emphasise the impact of the retirement scheme industry in Asia. Many jurisdictions in Asia, such as Singapore and Thailand, have introduced and changed some legislation/regulations around retirement schemes, with the intention, for the most part, to put it out into the private sector. These monies will flow into underlying funds and will have a significant impact on the value and the size of funds in Asia. Other markets such as Taiwan, Korea and India are currently going through regulatory change to try and encourage long term savings; initially through voluntary programmes but later on through mandatory programmes such as the MPF in Hong Kong. Moreover, many international fund managers are attracted into the region and many of those now look to outsource their back office. Fund managers are more focused on managing money, rather than building up infrastructure and new fund managers moving into Asia do not want to build infrastructure. In the past there were no real third party fund administrators working across all these markets and fund managers had to do this work themselves, that is no longer the case and outsourcing is therefore more popular. LEOW CHONG JIN: The asset servicing business globally

and in the Asia Pacific has evolved into a one-stop shop. Our customers, including fund managers, pension funds or government or sovereign wealth entities expect services ranging from the most basic—such as global custody—to more value-added services such as performance measurement, compliance reporting, or revenue enhancing products such as money-market cash management investment, or securities lending. Customer requirements and demands have changed over the years as they become more sophisticated and their range of investments has widened. Increasingly, we also see traditional global custody clients asking for hedge fund administration or private equity administration. All these trends are good for our business and making it much more exciting than what in the past people would tell me was a back-office operation. Asset servicing business is no longer a back office operation. ELIZABETH CHIA: DBS is largely a sub-custodian, whose

business is growing throughout Asia: both in developed and emerging markets. We are expanding into roles such as fund administration on the ground, for example in Indonesia, where the market in funds has been growing. In Indonesia the economy has been improving notwithstanding the political climate. Once you are on the ground you can tap into domestic demand which is growing fast. The market has evolved a lot. In the past it was about servicing very traditional fund managers and over the months there is a huge influx of high-net worth individuals and private bankers coming in. At the same time there has been an

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ALASTAIR MURRAY, head of investment administration, AsiaPacific, Institutional Fund Services, HSBC Securities Services

evolution in the growth of hedge fund managers. It is challenging to be able to service this growing range and segment of clients. It challenges system requirements and services at all levels and consequently we are investing more in systems, people and product knowledge. Additionally, there are requests for more equity financing and delta one products in the market, thus room for growth in securities lending in the region. In response to this trend we have begun to build a securities lending desk.

THOUGHT LEADERSHIP ROUNDTABLE

LEADING TRENDS

FRANCESCA CARNEVALE: Johnny, you are a good

example of this trend. Can you talk a little bit about the dynamics that led to the establishment of Cornucopia? JOHNNY HENG: The availability of good third party service

providers is critical to any start-up. Typically in any start-up in our kind of business, the principals tend to be people who are highly focused on the money-making aspect— front office business—and have very little experience or aptitude for the other parts of the process which are equally important in order to deliver a comprehensive product. What we look for is asset services providers who can give an almost turnkey service, ranging from custody, securities lending and securities financing. Moreover, the proliferation of the types of products and mandates and assets under management have widened a lot. Traditional managers now venture into hedge funds and hedge funds venture into non-traditional assets. To give good addedvalue as an asset service provider you must now help such institutions transition from what they are familiar with into areas which are unchartered for them. It is going to be a very interesting next few years and I continue to think that we should be able to see between three to five very good

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service providers enjoy good business in this area. High level skill sets are very important in this regard. JOHN DOYLE: Johnny made the point that you typically

find within asset management firms a couple of areas of expertise that they bring to the table. One is probably an investment capability that tends to drive our business over time. The second is distribution. Over time this will be a critical area of comparative advantage. As our business has evolved we have encountered challenges as we move from Singapore into the region, for two reasons. One we are probably not best of breed in the way we process, or the most efficient. Two, scale is a problem in a lot of these markets. Asia is not one single market. It is made up of multiple markets and to drive scale across the region, without a common platform like you have in Europe, is almost inconceivable. Malaysia is an example. The cut-off turnaround times on valuations are typically first thing in the morning. In Singapore the practice is to run our valuations midday and to have the reporting out in the afternoon. So work flows and everything front to back have to be different to cater for that requirement. That is a key challenge and obviously over time we will invariably push out towards service providers to provide solutions for us. I am hopeful that what happened with the UCITS market in Europe will eventually happen in Asia so that we can get a single passport across multiple countries. That will give us comparative advantage if Asia can provide that. However, most of these markets are driven by domestic regulation and they are at very different phases now in terms of opening up to investing, particularly outside of their own countries. Malaysia and Thailand are good examples.

TO COMMODITISE OR CUSTOMISE SERVICES? MICHAIL FOSKOLOS: In South East Asia investors are becoming increasingly sophisticated. They appreciate greater returns and portfolio diversification can be achieved by looking for investment opportunities beyond their own domestic markets. In the more mature Asian economies, the range of foreign asset classes investors are now exploring go beyond the traditional bonds and equities. There is now an increasing appetite for alternative asset classes such as global private equity, global property, and funds of hedge funds, and so forth. This greater level of sophistication and investor awareness has inevitably increased the demand for back and middle office services. At Mercer we have an entity called Mercer Sentinel which provides both a transition and custody advisory service. Investors in Asia are becoming more demanding as they recognise the significant differences between service providers. Increasingly my colleagues at Mercer Sentinel are asked: Which service providers are the best?” “How should we go about selecting a service provider that best meets our needs?” All this is invariably a sign of growing and maturing market place.

MICHAIL FOSKOLOS, principal consultant, investment consulting, Mercer (Singapore) Pte Ltd JEFFREY LEE CHAY KHIONG: For us the challenge is always to be able to add value to our clients and to find the best investment opportunities for clients on a three to five year horizon. Trying to recruit and retain talent, people with the ability to outperform in bull and bear markets. Over the last couple of years the Indian and Chinese markets have done very well and rightly so. They have very strong economic growth, vast economies and the challenge for us and our clients is “Where do they go next?” Where is the next investment opportunity? If you look at how these investment markets have performed last year they are up significantly. However, countries such as Indonesia are noticed much less. In fact, Indonesia was one of the best performing stock markets last year; up about 50% though it received relatively little attention. It is in identifying some of these key investment opportunities that we believe will add value to our clients in terms of their asset allocation. Playing into the downturn in the US, Indonesia is relatively sheltered. 75% of its GDP growth is domestic demand driven. It is a very strong consumption story. For the first time in recent memory across a wide spectrum of Indonesian society, people are enjoying the rising affluence. There is a big infrastructure story as well. If we are able to come up with the new ideas, the new investment opportunities can provide good risk-return profiles for our clients.

FIGHTING OFF MARKET FRAGMENTATION FRANCESCA: Elizabeth alluded to the fragmentation of the

Asian market and the challenges this presents asset service providers: even more so as investment styles become more complex. The challenge is exacerbated as asset service providers must offer a consistent and high level of service

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across multiple jurisdictions that may not have the supporting infrastructure for the markets’ growing complexity. How are you working to overcome that? CHONG: I guess the good thing is that when you look at

the competitive landscape and the service-provider landscape there are actually different service providers across Asia-Pacific.You have the global players such as the Bank of New York Mellon, and you have the domestic players such as the DBS and you have the niche players such as HSBC. Each of us is in a way catering to different segments and different requirements from our clients, including the fund managers. Then again, when you examine different segments within each country you see very different dynamics and very different requirements. Who would have guessed that China and its mutual fund industry, the Qualified Domestic Institutional Investor (QDII) would suddenly become an important segment so quickly? It has exploded since QDII was approved last April and its size is now easily worth $20bn to $30bn. The servicing model for QDII is quite different because by local regulations you have to go through a domestic ‘custodian’ bank who would then appoint someone like BNY Mellon as a global custodian bank. There are two layers of custodian-cum-fund administration type of services: one performed by the domestic custodians such as ICBC; and another, by global custodian such as BNY Mellon. That is very different than in other markets. As a global provider we have had to adapt very quickly to these types of arrangements and fully understand China’s specific structure and build support appropriately. It is much different from the services provided in say Singapore and Hong Kong because the relationship between service provider and the customer is quite standard, i.e., on a direct global custody basis. Asset Servicing is a people and technology intensive business. We spend some $700m on technology alone per annum, just to make sure we turn our lights on to keep our customers happy. ELIZABETH: Increasingly, clients request dedication and customisation, and it is challenging to customise very specific requirements. The task then is to put in an appropriate system. Today’s newer technology has the ability to be more flexible. So if we are looking at covering many markets around the region, we need a regional system with core modules and core functions, and yet dedicate core functionalities to specific markets. We no longer put different systems in different markets, because upkeep is very, very expensive. So what we do is have a common platform and then offer different database cuts for different markets, which we can customise according to our customers’ requirements. In that scenario, whatever we do for India is automatically available for China or Singapore. In that instance, the management of the investment space becomes a more rational and efficient process where you can customise for clients.

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ELIZABETH CHIA, managing director, head of securities services, DBS Bank Ltd JOHN: Our businesses have grown so quickly and the

demands of the business shift strategically as well. There is perhaps not enough attention paid to this area. I can think of a few examples internally of processes that are not efficient, proxy voting is one example. The problem is as you evolve from legacy processes to automated solutions it is essential to integrate properly. We don’t always do so in a seamless manner. This is something we need to tackle if we are to properly leverage the efficiencies gained through outsourcing to service providers. As our business becomes more complex, it becomes an equally critical issue. If you’re offering a standardised range of products everything is pretty easy to process. Now however, we are dealing with much more complex demands at the customer side of the business, we see the market going in several directions and that puts strains on our operational resources. And concurrently as markets and distribution evolve ( now you’re starting to see Fund of Fund solutions, you are starting see IFAs coming in with their own models for example) we are being pulled in multiple directions and in that case it is not so easy to find a simple solution to link us all up.

DISTRIBUTION: TOWARDS A COMMON PASSPORT? ALASTAIR: Accounting and valuations, custody and trusteeship are now treated as a commoditised service, but transfer agency is very complex and very fragmented across Asia. Our fund managers are coming to us and saying that they think custody agents are doing pretty well but there’s a lack of good transfer agency providers across the different markets. It’s a significant issue as you cannot make

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mistakes in the transfer agency sector. We are now providing transfer agency in five markets and are rolling out the service elsewhere in the region. A lot of the funds distributed in Asia are actually Luxembourg and Dublin funds and where that is the case the underlying administration is not done locally, it is done in Dublin or in Luxembourg. However, there is still a need for local transfer agency to collect fund orders and send out confirmations and statements in the local language and that again is where much of our focus is. In terms of the systems needed to service the disparate markets in Asia, we’ve moved into what we call open architecture which allows us to have best of breed platforms in each market and some of these may be bespoke local solutions. The way that’s presented to the client is through a single web based portal giving the client a single point of entry and global set of data. One final point to note in respect of servicing the funds industry across the region is the need to provide the services locally and on the ground and to support clients with local value added services. One of the key requests from our clients is of course local funds distribution and in HSBC we are fortunate that we have the footprint and ability to refer our clients to our Group members for fund distribution in our network. FRANCESCA: Jeffrey as a manufacturer can you identify

with what Alastair is saying? Do service providers really assist you with that all important distribution capability?

in my prior firm; we did not encounter major challenges as far as the ability of the global shops to tackle local problems. Only in very selective case did we have to really go niche and look for local players. The bulk of the global shops in our experience were very good. So as much as the single passport thing is good, we have been living without it well enough.

JEFFREY: Yes, most definitely. One of the issues we face

actually is in the asset servicing side is that right now from our business perspective, we offer funds – say for instance the funds are offered to the Singaporean public – they are manufactured here and they can only be sold in Singapore. For instance we have the largest money market fund in Singapore. We manufacture it here and we can only sell it here. For the Japanese market, we offer country funds, they are Cayman Islands based and they can only be sold in Japan. They cannot be sold elsewhere. Of course part of the reason is regulatory and the way the funds are manufactured and produced. So if they can help us find a structure whereby we can manufacture say a fund here in Singapore and it can be distributed everywhere in the world that would be wonderful. And of course many fund management companies have gone through the Luxembourg route which makes it very portable. It is not entirely true for the entire world, but maybe a large part if they are UCITS III approved. JOHNNY: It not realistic to even think of two passports, let

alone one passport and by two passports I mean developed Asia and less developed Asia. As much as asset managers, even ourselves, would like to have a single passport to facilitate all of this, we do not think it is going to be possible in the next three years and therefore the focus should really be to get a good job done at the local level. In most cases the global shops such as BNY Mellon, as per our experience

JOHNNY HENG, director, Cornucopia Capital Partners Singapore Pte Ltd

ELIZABETH: In terms of funds it is a very interesting area

we are straying into. On the asset servicing side we see the ability to service fund distribution requirements. I am referring to both the domestic and the international crossborder scene. If we look at what Alastair was saying that he is localising in terms of some of the services. It resonates as our clients also asked us for much more than normal custody services. Clients are now asking us to provide a subscription and redemption for funds processing. Normally this should be something that can be done easily, however the great challenge is that in the funds market many of the processes are still manual. Some of the transfer agency provider would have the necessary technical sophistication which means working with them is easy. However, there are various other service providers that are not on SWIFT for example and it is a challenge to communicate with them because their process flow is very manual. We venture into this service to provide a one-stop shop to our fund managers. There are a number of IFAs, private bankers and asset managers who are asking us to do more work. We are starting selectively, as it is a great challenge. In Singapore for example, although a sophisticated market, it lacks behind when it comes to fund distribution servicing. In that respect, SWIFT and CDP have been looking for a solution. To go cross border is an even bigger challenge, there a requirement for extensive infrastructural support. There are other parties such as

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Euroclear and Clearstream banking who support this function in Europe for the Luxembourg funds. They do a good job in Europe but they have not been able to bring this expertise to Asia yet.

THE GROWTH DYNAMIC FRANCESCA: Do you think that Asia will be pulled into the

global markets through the intervention of outside agencies, or will it be forced to overcome the challenges that Johnny outlined?

regulatory environments across the region differ, are at different levels of development, and are not generally geared to cope with greater regional and global integration. In the short term, it is difficulty to see how national perceptions, and regulatory environments in less developed Asian economies would be able to change sufficiently to accommodate greater market openness, However, within the next five to 10 years many economies in the region will begin to emerge and this will no doubt lead to greater liberalisation. At that point, I would guess that not only the asset service industries, but also investment consultants, will be in even greater demand.

JOHN: Ultimately competitive pressures will drive change.

There are opportunities around the region but frankly many of these markets are sub-scale for us, where we cannot really justify bringing product to market directly. The reality is however that everyday that we sit still and don’t expand we are losing comparative advantage to other players in larger markets that are more open. The more developed markets in Asia are opening the doors to let in more products. So we are sort of shooting ourselves in the foot by doing nothing. Take transfer agency as an example. Compare where service providers are today, in Asia versus the US. Boston Financial Data Services (BDFS) operates in the US which is the largest mutual fund market, and it has a market share approximately 70% if I am not mistaken. Moreover the amounts of investment and efficiency they can drive through that platform is at a different level completely. The reality is that the investment is needed regardless because it’s a performance issue. If you don’t perform then we have liabilities on multiple fronts and we cannot afford to run the business where would expose ourselves to these liabilities. I am passionate on this issue as I grew up in the US and we used the BDFS when I started working in the industry . The difference in scale are very apparent when compared to operating practices in this part of the world. The same thing is starting to happen in Europe now, with the common currency and the fact that the UCITS market is becoming a common platform. Those efficiencies are becoming the global reality. If we do not acknowledge that then our shelf life will be limited in certain parts of the business. I was focusing more on the retail side of the business so I apologise if my comments were a little skewed there.

ARE ETFs AN ALTERNATIVE TO A COMMON PASSPORT?

MICHAIL: There is little doubt that investors in Asia now appreciate the arguments in favour of increasing their foreign exposure. They understand the concept of diversifying their asset classes and the benefits that flow through to their portfolios. They also understand the arguments in favour of liberalising markets. However in many Asian economies, particularly those which are less developed, it is important to recognise that powerful arguments still exist that run counter to market liberalisation. Indeed it may be quite difficult for less developed economies to see how an open market policy would benefit their national interests. Furthermore, the

JOHNNY: I am some what cynical about the potential

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JEFFREY: Increasingly we see a trend of ETFs developing in

Asia, of course in the West they have gone not just into passive ETFs but more actively managed ETFs. In Asia the ETF market will grow as the stock markets develop further. There is demand for exchange traded funds in Asia first focusing on each individual countries in the Asian markets such as Indonesia ETFs or Thai ETFs but as the markets develop further there’s also demand by global investors say for resources or energy ETF in Asia and this perhaps will be a more efficient way for fund managers to get their funds and products bought and sold globally through their various exchanges rather than just distributing it in the normal open ended structure for mutual funds. I would also like to highlight the rapid development of the real estate investment trusts (REITs) in Singapore. You are able to raise money fairly quickly in Singapore, to invest in real estate, not just in Singapore, but throughout Asia. Right now, in the Singapore stock market you have REITs that invest in properties in China, India, you know and other parts of the Asia Pacific Region. And of course the exchange traded fund (ETF) which is very well developed in the US, you can easily get exposure to the US market by buying the SPDR or the DIAMONDS with just one trade in the ETF. And this will develop in Singapore. Of course the Singapore STI ETF is not as liquid as what you would like compared to say the DIAMONDS or the SPDR. But as the market grows, as investors appreciate the use of these ETFs then liquidity will also improve.

growth for passive ETFs in Asia. To manufacture the ETF as effectively as you can you want to be able to replicate the underlying index. In Asia, even the benchmark indices, the tail end of the index tends to comprise very small names than the upper end. That makes replicating the index very difficult and imperfect and raises the cost of replication to a point whereby it may no longer make sense for an investor to pay the seemingly high fee for a passive product. Also, there continues to be a great belief that you can add value by selecting stocks in Asia because of the inefficiencies in the market. So these two factors, as long as they continue

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LEOW CHONG JIN, head of Asia, BNY Mellon Asset Servicing

to exist would make the viability of passive ETFs questionable. Now, back to what Jeffrey mentioned on a couple of thematic plays you can go into, energy plays and so forth. In Asia, it is very difficult to put together a panAsian sector index for enough indices. There might be a couple available. But let’s ask ourselves, can we even put together a Pan-Asian bank index? The performance of the various banks in different countries differs a lot from each other. Since there are few commonalities, even among common sectors across different markets, it begs the question,“how easy is it to put together a sector ETF?”Then again, even if we look to developed markets as benchmarks it is really only in the US that we have very well traded sector ETFs. It is not quite the case in Europe. My hunch is there might be a better chance if the reverse happens here, whereby active ETFs are created by some well established managers. It could be something quite akin to the PowerShares that we have in the US, but it has to be an actively managed ETF whereby you can command respectable fees. The investor mindset is still very much driven by the fact that you can add much more value selecting stocks as opposed to just trading around markets. For that reason, it will be quite difficult to be very optimistic about the ETF market here. ALASTAIR: The reason most ETFs or funds actually get listed is to provide liquidity for the underlying investors investing in illiquid asset classes or strategies. So we have provided services to index tracking funds, REITS, and in Europe particularly, we have provided services to quite a lot of hedge funds that are getting listed in Dublin and now Luxembourg that are trying to encourage that as well. The reason for the introduction of ETFs to the discussion was because we were discussing a method of trying to improve and streamline the process for subscriptions and

redemptions into funds. My view is that it is much easier to invest in a security through the exchange than investing in funds. That involves transfers of pieces of paper, submitting due diligence documents and then on redemption waiting for up to five days or longer to get your money back. So logic would say there is a place for listing funds to simplify that process. In Hong Kong they did amend legislation and regulations about 18 months ago, to try and encourage more active funds to be listed but very few active funds have actually been listed there. There are a number of reasons. First of all the stock exchange is just not geared up for open ended funds and clearly if you are an active manager and you are wanting to gather assets into your fund, you are not going to launch a closed end fund. The creation and redemption of units by injecting other securities is quite messy and quite a complex process. It may also be that investors want certainty of trading price, in other words at NAV rather than trading in the sentiment of the market and that may put investors off. Further it is an expensive way to launch a fund as this would be done through an IPO and there are more costly regulatory reporting and disclosure requirements. There are a number of reasons it is not working, however we shouldn’t stop there. More could be done and that’s something that perhaps the industry should lobby for both with the regulators and the exchanges to try and improve the process.

A QUESTION OF PRICING CHONG: Pricing of services is a challenge and a healthy challenge between the service provider and clients. As service providers, we are making the margin and profits otherwise not many of us would be in business. Those that price badly or do not make money tend to have been consolidated in the last few years. When it comes to pricing the important aspect is that it really comes down to competitive pressure in the country itself and what the country or the customers can bear in that market. If I say that it costs only $100 to settle a trade in emerging markets, we may not necessarily be charging $100 to every single customer that buys or sells in the market because certain clients just don’t like to pay on a transaction basis. They tend to take into account other service aspects, such as local presence or localised services, which they value and may be willing to pay more for. Increasingly we find that pricing is no longer on a trade by trade or service by service basis. Instead it tends to be bundled. Customers tell us that ‘we want custody, we want fund admin, we want compliance and we want sec-lending, give me a bundled Fee.’ We have different pricing models to cater for different services taking into volume, countries of investment, size, etc. Very often the consultant would look in detail at the pricing submitted by all the different service providers and then make a recommendation to the customer as to what is a fair price. In the end though, given market dynamics, we tend to come out with a price that the

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market can bear and as long as both sides benefit there is always a happy story at the end. The key question is whether or not the custodian or transition manager offers a competitive advantage, and whether it is best equipped to meet the specific needs of the client. Asia is no different form anywhere else in this respect. The cheapest price does not ultimately prevail, rather the firm that wins the day is more often than not the one that has the greatest potential, all things considered, to serve the specific needs of the client. Mercer and other consultants play a crucial here as we help clients identify and bring into focus the factors, other than fees, that will differentiate service provides, in a manner that engenders value for money.

While the margins are tough, they’re not collapsing and I’m happy to say that because we depend on them ultimately. It’s a symbiotic relationship.

MICHAIL:

ALASTAIR: Yes, once again our core business differs slightly from the traditional custodian business. As a fund administrator and by the nature of our business our fees are very transparent. We’re acting either as a trustee or as fiduciary and we cannot make any secret profit so it’s very clear what our fees are. Also in terms of value for money, we have a very good benchmark because a fund manager in many cases could do this work themselves and they will not outsource to us unless they think they are getting value for money. In many of the markets we are an early player and thankfully most of our clients recognise we need to make a profit, build critical mass and this allows us to reinvest in the business to improve infrastructure and service and most clients are happy with that. FRANCESCA: John, are you in a favoured position where

you can dictate terms? JOHN: What’s clear is we have certain capacities/ capabilities and as I said earlier operations are not something that asset managers typically excel in across all fronts. Most of us have recognised that there is value added by looking at outsource options and looking at building the business over the longer term, from the perspective of integrating efficiently and effectively with these outsource providers. Now of course over time as the business grows and the profits grow we look critically at what we’re paying and we do review it periodically. We have to in the interest of our clients. But then at the same time we also constantly review what we’re doing internally. For example, I have a performance team that reports up to me, and part of what they do is run attribution analysis and I’ve asked them to look at the feasibility of outsourcing that whole piece. I’d rather their time be spent more on the value-added analysis and want to understand if we can free up resources though such arrangements. Having observed the Trusting & Custody banks, the major global players, they’ve done a tremendous job of extending the value-added spectrum of what they can offer to client over the last few years.

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THE NEXT FIVE YEARS ALASTAIR: We have spent the last few years expanding into the markets where we think our target client base, international fund managers, are also targeting and now we have a good coverage of those markets. The key focus is in North Asian markets: Taiwan, Korea, India and China. These are relatively mature markets, with the exception of China and make up a large percentage of the total Asia mutual fund market. Taiwan is a relatively new market for outsourcing and we are the first provider to get a license to do that. We have a strong pipeline of existing fund managers wanting to outsource to us in that market so we are going through that process. Korea is a big mutual fund market and there was a dramatic change in our operation there last year because they introduced tax legislation which penalised the sale of Luxembourg and Dublin listed funds. Last year we had all of the international fund managers in that space setting up local domestic funds that would invest overseas so we have been very busy in that space. India is relatively new to fund manager outsourcing but they are starting to do that and I can see that growth. But India is a very complicated market from a fund administration point of view. It has a lot of local domestic rules but it is an area where we see huge growth so it is going to take a lot of time and investment. And China. China is a huge funds market and is growing much faster than anybody anticipated. From a business opportunity point of view, it is the one market in Asia where fund managers are not allowed to outsource, they must conduct the fund administration themselves. There is not a lot of sense to that. The fund manager should be able to outsource to a specialist provider and we are lobbying for that to happen. What we are able to do in respect of China is that we have been approved to act as a fund administrator for QDII funds. These funds are investing overseas and we have been approved to act as a fund administrator in respect of the overseas funds. One market where there is an awful lot of talk is Vietnam. The infrastructure there is good. The rules surrounding asset servicing are clear and well thought out. However the market is well behind the rest of the markets in Asia. There are only closed end funds in that market space. They are not allowed to invest overseas and there is not as much domestic money, retail money, in Vietnam as there is in some of the other markets. Where a lot of the attention is targeted in Vietnam is inward investment. There is a lot of offshore private equity funds investing into Vietnam and we are active in administering them, but in terms of the retail market we think there is still quite a long way to go. JEFFREY: We have been asked by our clients overseas such as in Japan on where to invest next because most of them

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have already been well exposed to India and China. We have come up with investment alternatives, they may not be the complete solution but we believe that markets like Indonesia provide an alternative for their investment funds. Indonesia is fairly resilient to a US slow down and we believe that the US will slow down substantially and the Fed will cut interest rates aggressively, just like it did in the early 1990s. One of the unintended beneficiaries of those aggressive interest rate cuts are Asia’s emerging markets. In the early 1990s when the US had the S&L crisis the markets in the Asian and emerging markets such as Indonesia, Thailand, Malaysia did extremely well. Some doubled and some more than doubled. This time we feel Indonesia, Vietnam, Thailand and even Taiwan, country funds will be good investment alternatives for those investors already fully invested in China and India. In the next one to two years we also expect volatility in the markets to increase substantially. As you know in the last couple of years, markets have had a very smooth run, but going forward, volatility will increase substantially, and some of the best investment strategies for us would be to write put and call options on the stock markets in Asia and this will provide us good absolute returns independent of where the markets are trading. More importantly this is the year where we really have to think where we can find the best value. Last year Indonesia returned about 50%; one of the best performing markets apart from China and India. Indonesia is resource rich, more than 230m people, very well endowed with natural resources, one of the world’s largest exporters of palm oil and coal and is very rich in gold, copper, nickel. Right now throughout Indonesia there is a consumer boom, as people are getting richer as a result of high palm oil prices, rubber prices, base metal prices and coal prices.

we look forwards towards because the problem is with the a lot of the markets is that the churn rates are just too high, a reflection that they’re still immature. Even though Taiwan is a developed market from many standpoints from an advisory perspective it’s actually very underdeveloped and very momentum focused. But were starting to see some signs that models are starting so shift there and the interest is actually coming into what we consider more a range of core products that should be on the shelf. FRANCESCA: Elizabeth, there’s a lot of commonality there some overlap, some not, is that in line with your long term outlook? ELIZABETH: Yes, one of the things that has been said here again and again is the fund distribution capability and there seems to be a lack of automation in handling this in local markets. Moreover, China’s mutual fund industry has exploded, including India, so whatever service you provide in these markets, you might be able to leverage into the region to capture both domestic as well as cross-border traffic. As the fund management industry grows in terms of hedge fund outsourcing, there are requests in building more complex fund administration services. Particularly important to me is how do we respond from a securities lending perspective? If you look throughout the region, even the stock exchanges and regulators are looking at going into securities lending. Some are keeping cautious by beginning the service with an exchange assisted programme, testing out demand and processes before the product is offered to the market at large. All this activity will generate more participation in securities lending, and improving services all round. JOHNNY: I would pluck off one point. Singapore’s role as

JOHN: Asia is growing tremendously, especially in our

industry. The current operating environment is proving more difficult based on what is happening in the US based on market growth. The tail winds we had over the last couple of years clearly aren’t there in terms of growing our business. If we went to Malaysia a year ago and we wanted to launch a fund or were advising on a fund we would expect to raise in the hundreds of millions of Ringitt on each fund launch. Today the reality is rather different, so the important thing is to focus on our core capabilities and making sure they are performing. I still think there is the longer term demand out of these more emerging countries to basically have alternatives to diversify portfolios and better meet clients’ needs over the long term. The diversification concept is pretty applicable in this environment and we have plans along that front in terms of Malaysia. We’re also pretty well represented in Taiwan and have seen some traction in that market. What I’d like to see it on the distribution side of the business, is that once these markets reach product saturation the distribution models will shift towards more advice shifts to a higher level of discussion along solutions. And that is something

an asset management centre, People have long said that China is Hong Kong’s great hinterland and as far as the Indian market is concerned, Singapore can claim to be well placed for growth. I also think one area of business opportunity is the Middle East. We are now seeing the liquidity and power of the sovereign wealth funds and I have no doubt that the Middle East asset management market there will start to evolve there at pace. Investment banks are already setting up shop there to tap this growth. I see Singapore’s role as that of an opportunist, capitalising on what I would describe as the Middle East’s obvious distrust for the West. Singapore can offer a very good platform for the Middle East in that regard—to provide a conduit (whether in the area of asset management, talent, or distribution). Singapore can potentially leverage on its good relationship with the Middle East, to make it a potential hinterland for us. MICHAIL: Mercer is extremely excited about Asia, and in particular we have grown the business over the last two years, both in Singapore, from where we cover South East Asia, Hong Kong from where we cover North Asia, and

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more recently Shanghai from where we cover China. The reason for our growth in Asia is not based on a blind desire to gain exposure to the region. It is a well reasoned strategic move based on actual demand, as well as perceived growth. It is testament to the fact that investors in the region are becoming much more sophisticated in the way that they operate, and as they do they demand more of their services providers. In China you now have very substantial institutional funds, and those funds are increasingly cognisant of their duty to their stakeholders. The way in which the funds are serviced is becoming more important, as are decisions relating to manager selection and long term strategic allocation of their funds. In fact, you are beginning to see similar trends across region. In Thailand, in particular, with the relaxation of foreign investment guidelines for institutions, there is greater scrutiny of service providers, managers and long term investment strategy.. The same can be said for Malaysia, Vietnam, and even Singapore. There is more sophistication. This causes greater complexity and where there is complexity our advisory services meet with greater demand. CHONG: I am glad that everybody shares the same sentiment that the Asia growth story is here to stay. Our CEO told us when we did the budget late last year that if Europe was growing at twice the pace of the US then he expects Asia to be growing at three times that rate. As the business owner for Asia and whilst acknowledging the pressure is there, I agree the growth story is here. You just have to look at the make up of Asia-Pacific countries. They truly are at diverse stages of development - even in very established market like Japan, there are still a lot of changes, for example, the privatization of Japan Post, happening there that can make it very interesting for service providers like ourselves. Looking at Asia as a whole, while there are different numbers being thrown around, the total investable fund from Asian based investors is around $15trn to $18trn. Of this amount, not much of it has as yet gone overseas. So for global custodians and fund administrators like ourselves, we see enormous growth potential in quite a number of markets in Asia. An important future growth segment is pension, in particular in countries with large population, such as China and India where pension reforms are only just starting to take shape. As we know, Australia’s pension (superannuation fund) growth over the last 10 or 15 years has simply been phenomenal, and if some of the Asia countries could follow the lead from Australia in pension reforms, we could certainly see pension in Asia as the next growth segment. . Earlier, we also talked about the explosive growth of QDII in China, and we expect that the mutual fund industry in a number of other Asian markets as another growth segment. On services, such as performance measurement, I fully agree with what John said earlier that fund managers should be focusing more on analysing the data as opposed to putting together the reports. We are seeing that trend in other regions where performance measurement has been outsourced to service providers. .

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JEFFREY LEE CHAY KHIONG, managing director and chief investment officer, Phillip Capital Management (S) Ltd.

Another service that we are beginning to see being outsourced is derivative valuations where current practice is to do it inhouse and on a very manual ad hoc basis. My asset management colleagues here may agree with me that this is a service that they may be willing to pay for if it can be provided to them ‘hassle free’ , timely and accurately.. So, in summary, we see strong growth in Asia, more assets being invested overseas, and increasing acceptance on specialised services such as derivative pricing or performance measurement being outsourced. As service providers, we always say that we are long term partners to our customers. That is especially true for the asset servicing business. I don’t think customers like to change service providers often and obviously, we do not like to lose customers. Pressure is definitely mounting on asset servicing players to step up and truly understand customers requirements, globally and locally, and to meet their needs.

THE IMPACT OF THE MARKET DOWNTURN ELIZABETH: Actually I would be very interested to hear the

opinions of the fund managers here. We are at the crossroads in the beginning of 2008. Last two years the Asian markets have enjoyed tremendous growth. The US market has slowed down, coupled with the sub-prime woes. Is that something you are concerned about in terms of the investment climate and also in terms of the economy, do you see Asia being impacted or do you think

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Fun

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it will hold its ground? Do you think all of these will change your asset allocation? JEFFREY: We have looked at American history and we have

found that in no point in time in American stock market history has there not been a recession when the housing market is in such dire conditions and you have rising unemployment. We believe the Fed will cut aggressively, just as it did in the early 1990s when the US had the savings and loan (S&L) crisis and Asia will be the unintended beneficiary. You may recall in the early 1990s as the Fed cut interest rates, money flowed into Asian markets and in fact in 1993 Indonesia went up by more than 100% and similarly Thailand did very well: Malaysia too. The positive response from the Singapore stock market was a little bit more muted. Having said this, Asia will not be able to escape the effects of this latest US recession. The markets in Asia will go down with the US. However, Asia will outperform US and Europe over the medium term and if you will recall just as in the past, when global markets sell off as they did in 1987 Black Monday, Japan and the US all collapsed simultaneously. Of course it was first led by the 20% correction in the US which led to the collapse in the Asian markets. But thereafter Japan recovered very quickly and made new highs before it reached close to 40,000 and started the bear market which it has suffered for many years until now. Actually valuations right now are fairly reasonable even in Japan. In Taiwan we can find companies that are giving out dividends way in excess of bond yields. Every time we see that it gives us a great buying opportunity. Of course the situation in Taiwan and Japan looks terrible, the economies are not doing well but there are global companies which will continue to grow and will provide strong dividend yields. Therefore we are fairly optimistic as long as we are able to stick to some of these strong global Asian companies then we will continue to be able to deliver reasonable returns to investors despite the very gloomy environment we are faced with. JOHN: Internally we have certainly had a lot of discussion around this. Is the US heading for recession or a quasi soft landing? Increasingly our view is that while we don’t know the answer to this for certain, it will clearly be a more challenging growth and operating environment for some time. Does this impact our investment philosophy or approach? No. Our core equity products are always looking for what we think are good opportunities to invest in high quality businesses. We are fully invested by and large. We are a little bit higher in cash now because of some concerns that we will see redemptions coming through. We are clearly biased towards to more defensive sectors and are focused on companies that help us to deliver attractive growth in valuation characteristics. On the product side I would say that the current environment is influencing what we think is appropriate to recommend at this point in the cycle to clients. We are having active discussions with different distributors around the region about what may be appropriate. They are asking us for ideas and we are clearly

JOHN J DOYLE III, senior director, UOB Asset Management Ltd

factoring in what we think will be a slow down and we do believe Asia will be impacted. The excesses in the West have been financed largely by Asia and the Middle East. And those excesses are creating strains in the broader capital markets and financial markets that will have repercussions over time. So we are positioning our portfolios defensively, not just in the US and Europe but also in this region. Countries that aren’t directly manufacturing and selling into the US, might offer greater degrees of insulation and countries / companies that have historically borne high costs of capital are not going to see the delta in terms of capital costs ratchet through their economy. Are we going to move out of equities if we are running an equity product? The answer is no. But we are trying to preserve value in what might be a more difficult environment. Equities have already priced a lot of the negatives and remain attractive vs. other asset classes. So it will be a tough environment but I personally have not moved out of equities and in fact I am looking to continue to add as things get cheaper. JOHNNY: The markets have already started to price in a

recession in the US. If you look at the S&P500, it will possibly fall another 5% to 7% down to somewhere closer to 1,300. At that level the market will have fully priced in a recession and I don’t think we should be overly bearish. Right now, we still have downside risk. I’m not a buyer of this decoupling story. Asia is not totally decoupled. However, on a relative basis I would expect the emerging markets, particularly those in Asia, to do better than the developed markets. That has been the case in the last two US recessions, so I don’t see it being any different this time around. The dollar will continue to go down and I cannot think of enough reasons to be bullish on the dollar right now.

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

Fun D d B i sc uye oun rs & ts F Dis or trib uto rs

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TOWARDS 2020: THE EVOLVING ASIAN MARKET 70

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PHOTOGRAPH © GIORGIO MICHELETTI; SUPPLIED BY DREAMSTIME.COM, FEBRUARY 2008.

BUILDING BRIDGES IN A FRAGMENTED MARKET Establishing a cohesive asset service array in a highly fragmented regional market poses challenges for providers. With Asia’s burgeoning equity and debt markets at different levels of maturity and complexity, offering the right package to the right client is not easy. Not only that, Asia’s manufacturers and distributors are not waiting for interim services even as their local markets (and regulators) evolve. They are after a high level of service and connectivity irrespective of the limitations of their own market. Can providers meet the challenge? Scott McLaren, managing director of RBC Dexia Investor Services in Hong Kong sits in the Q&A hot seat. How much is a 360 degree service a feature of today’s product array for an asset servicing firm (encompassing transfer agency, payments, asset servicing, value added services (collateral management, securities lending, risk management etc) and fund administration in Asia; or will the requirement of the market ultimately define new product arrays? As you increase up the value chain there is less demand for sophisticated analytics and some Asian market regulations restrict the ability of some local funds’ ability to lend or borrow securities. Some markets, such as Malaysia and India, for example are now making strides in encouraging the development of securities lending. Elsewhere in the asset servicing arena, as the market matures, there will be more call for outsourcing of the core functions in asset management firms. Particularly in an environment of rising costs for headcount and office space, fund managers may look harder at what is their core business and core competency and

outsource selected functions it if they feel that a service provider can provide the same or better level of service. Have the relative advances in asset management infrastructure and supporting legislation in markets such as Taiwan, South Korea, Singapore, Malaysia and Hong Kong concentrated new business opportunities? We are starting to see a move towards better infrastructure in the funds industry, but progress can be slow. For example, there is little or no automation in some markets and processes remain paper and fax based. While Europe has embraced SWIFT as a protocol for straight through processing, the subject continues to be debated in Asia with little or no progress; although through the Association of Southeast Asian Nations (ASEAN) there are serious debates about the emergence of cross border trading and settlement platforms, which is encouraging. There are

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stirrings elsewhere: we are only starting to see the first distributors in Taiwan take the initiative seriously, for instance. Despite full support from all the major fund houses and service providers, we need the distributors to come to the table and take a more active role in encouraging regulators to accept changing market conditions. What of high growth markets, such as Vietnam? What responses have these markets elicited from service providers? High growth markets in Asia such as India, China, Taiwan and Vietnam have all elicited interest from the major service providers. However we should not forget that these markets are still by comparison relatively small and investments required to get into the markets may only be recovered several years down the track and on the basis that markets continue the same growth trajectory and competition does not impact margins adversely. Is cost a key consideration in the relationship between client and provider in Asia? If not, what are the main reasons that Asian clients chose an asset servicing provider? Are those factors common throughout Asia, or is the market sufficiently fragmented that providers need to apply different service solutions to regions or countries? Cost remains one of the key considerations along with systems, staff and track record. The more regional asset managers may look at regional or even global coverage so that they can consolidate as much business with one provider and gain some economies of scale. The service still needs to be tailored to each country as each one has a different tax treatment, reporting requirement and potentially different language required to meet the local servicing criteria. Do you see the rise of multi-asset investment strategies, and more sophisticated portfolio investment strategies in the Asia Pacific region? In this complex market place what tools does the asset service provider require to develop an effective footprint in the wider region? Specifically what are the most requested service offerings? At RBC Dexia, we aim to bring our expertise in the Asian region to our clients in Europe or the US who have not yet entered the market. Our service includes introductions to local firms and an overview of the distribution landscape in each of the main countries in Asia. This service complements our support say of a European UCITS structure which can be passported into Singapore, Hong Kong and Taiwan. Secondly, we are seeing huge growth in the number of offshore funds being introduced into the Asian markets and this trend will limit the requirements for full service provision in the future as clearly a Luxembourg or Irish fund distributed in Asia does not need the same level of support that a locally home grown fund would. What are the main challenges you face in establishing a footprint in the wider Asian region? Is your growth strategy

FTSE GLOBAL MARKETS • MARCH/APRIL 2008

focused on key or particular markets? How are you diffusing your product offering among manufacturers? How would you describe your principal client base? How close is this profile to your ideal? Key to meeting clients’ requirements is to fully understand them and to have a close dialogue on both the day to day business but also a strategic vision into their future plans, be it product, geography or distribution. At the operational level it’s about agreeing on the key deliverables, documenting them and then measuring and reporting on a frequent basis. Beyond operational day to day dialogue, like other providers we take into account future projects and the ability to provide both expertise and demonstrate long term strategic alignment with the client. Measuring the key deliverables centres mainly around quality and timeliness. The isolation of key performance indicators (KPIs) is the most applicable method of measuring these agreed deliverables. However, getting this right can take some time and therefore percentages are the best method of measurement since they factor in growth in volumes. The Asian markets in 2007 have shown significant growth in assets and hence in operating volumes and in a climate of heavy manual processing it is realistic that your risk profile for errors increases as the volume of business transacted increases. However, over the long term, this will invariably change as more technology is adopted in the broader region and effective cross-border platforms are established. Discussions in these key areas are underway in many markets, though it may be some years before we see efficient trading and settlement in some of the more frontier markets. In this rapidly evolving market how do you ensure you are meeting your client’s fund administration and/or asset servicing requirements? How can you be sure? What are these requirements and how do you measure them? What are the current limitations on the growth of fund administration in the Asia Pacific? Is the market for fund administration still defined by the Australasian markets? One concern around growing businesses in Asia is the manual nature of the operating environment. This will truly create a bottleneck if volumes increase significantly. The silver bullet to this is automation and solutions, such as Swiftnet funds. is the panacea to many ills. Adoption of automation is however very slow and is only starting to gain ground now after several years of discussion. If the markets continue to grow, pressures on staffing and costs will only be mitigated by a more robust and automated operating model. I personally do not see that the Australian market defines the Asian ones. While Australia is a big market it remains ostensibly a domestic one and the markets of Taiwan, Hong Kong and Singapore operate at both domestic and offshore level. In some ways Australia is more standardised and in other ways they are adopting procedures which have been in place in other markets for years: for example, in the area of anti-money laundering, late trading or suspicious activity.

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ASIAN SECURITIES LENDING: READY FOR A GROWTH SPURT 72

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LEVERAGING FRAGMENTATION For some years now Asia is regularly touted as a hotspot for securities lending. Reality bites though and the transformation of the region’s market to adopt securities lending (with the honourable exceptions of Australasia and Japan) has been slow with regulatory restrictions, sometimes poor corporate governance and tax barriers hampering market access for international firms. However, as margins and arbitrage opportunities become less attractive in the mature markets in North America and Europe, asset managers and hedge funds are putting more emphasis on the emerging regions, such as Asia in search of that extra bit of return. Moreover, with markets such as India now beginning to look seriously at implementing a regulatory regime supportive of securities lending and a host of countries building on nascent opportunity in the Asian market, times have rarely looked so good for those specialists anxious to gain a profitable footprint in the region. Just how far can Asia go? By Francesca Carnevale. Whatever the level of fragmentation between market conditions conducive to securities lending in Asia, regulators in the Far East have started to recognise that securities lending is a critical element to help increase market liquidity and an effective vehicle to encourage international investment. Korea and Taiwan are established securities lending markets. “Building the right platform that incorporates the requirements of foreign lenders and borrowers will be a key factor for success,” thinks Squillacioti. Moreover, he explains that there are different regulations, reporting and taxation requirements, which vary across the region. As such, strong market due diligence, specific market knowledge and expertise in a changing environment is essential for success. Photograph © Scott Maxwell; supplied by Dreamstime.com, February 2008.

HE POTENTIAL FOR securities lending in Asia has never been more apparent as spreads widen and demand for local securities increases. According to Francesco Squillacioti senior managing. director and regional business director, Asia-Pacific Securities Finance at State Street says,“Asia presents a good combination of players looking to participate in securities lending; both institutions with global assets active in Asia, and indigenous institutions anxious to be involved in the global markets.” State Street, which has been proactive about increasing its securities lending staff in the region, has offices in Tokyo, Hong Kong, Singapore and Australia, from

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which it handles securities lending, “and we may be opening new outposts to take advantage of further growth in the region,”he adds. Squillacioti explains that securities lending among indigenous institutions in Asia still exhibit early phase characteristics with demand and supply of both equity and debt dependant on the market and underlying investment strategies. Typically, governmental institutions are active in fixed income programmes, though he notes there is increasing participation from insurance companies and banks.“The next organizations expected to enter the market are mutual funds; that generally is the sequence of market participants,” he explains. Moreover, Squillacioti clarifies that these characteristics are evident outside of Japan and Australia which are mature markets and“work pretty much as securities lending does elsewhere. Clients in Australia and Japan are split pretty evenly in terms of participation in equities and fixed income lending programmes,” he explains. From a trading standpoint these two markets dominate securities lending in the region, with Japan ahead by a country mile and Australia coming up behind in second place.“The interesting thing here,”notes Squillacioti,“is that even the mature markets show signs of increasing volumes and can be as challenging and as exciting as the more emerging markets. There is still much to do.” Brian Lamb, chief executive officer at EquiLend echoes the view.“We think that Japan will be very interesting for us going forward as trade volumes are significant and there remains a lot of upside potential; particularly with local players. Like other key providers, we find there is a growing demand for high quality services as markets and regulatory regimes in the region evolve.” For the time being, Equilend is not adopting a particularly Asian strategy, but instead rolling out its global platform to more clients and continues to upgrade its services in Asia on an on par basis as it does elsewhere. Lamb points out as an example that last summer EquiLend rolled out its post-trade services in Australia and Canada at the same time. Equilend’s after trade offerings help clients maintain their securities financing positions more efficiently; providing services such electronic tracking, faster processing, increased reconciliation speed, risk management and easier billing and Lamb notes a desire on the part of clients in the region to“fly to quality.” It is of particular importance, thinks Lamb, in an environment, where MiFiD is in play in Europe and ALD was rolled out in the US and will likely impact on Asia soon. “It points to a leap in sophistication, even as the markets in the region are developing and in that vein, it is a very interesting period,”he notes. Whatever the level of fragmentation between market conditions conducive to securities lending in Asia, regulators in the Far East have started to recognise that securities lending is a critical element to help increase market liquidity and an effective vehicle to encourage international investment. Korea and Taiwan are established securities lending markets. “Building the right platform that incorporates the requirements of foreign lenders and borrowers will be a key

factor for success,” thinks Squillacioti. Moreover, he explains that there are different regulations, reporting and taxation requirements, which vary across the region. As such, strong market due diligence, specific market knowledge and expertise in a changing environment is essential for success. Those institutions participating in the market are not unduly concerned right now about the vagaries of Asian securities lending. After all, notes Squillacioti, there is a future of powerful consolation before them as more markets enter the arena and the opportunities in some of the larger markets, such as China, will eventually come into play. Second, there are typically higher returns in the newer markets with lower levels of liquidity,“a lot, too, depends on the collateral and other parameters that clients place on the program,”In those markets where an efficient stock lending infrastructure does not exist, short interest is normally synthetically derived and swaps are the most common instrument used. A fund manager will enter swaps on is long positions and prime brokers can then sell the long positions on behalf of a hedge fund, say, to generate the short position. In those markets where an efficient stock lending infrastructure does not exist, short interest is normally synthetically derived and swaps are the most common instrument used. A fund manager will enter swaps on is long positions and prime brokers can then sell the long positions on behalf of a hedge fund, say, to generate the short position. However, as specialist providers expand their footprint in Asia, the Asian securities lending market is beginning to take on substantive shape and form, even in a large and still largely fragmented regional financial marketplace. In this regard, the market is moving fast. JPMorgan, for instance, is among the latest crop of banks to announce expansion plans in the region on the back of new business opportunity, announcing that it plans to add at least 700 staff to its Asia-Pacific headquarters in Hong Kong over the next three years and lease up to 11 floors in a new office block to accommodate growth. Roy Kinnear, JPMorgan’s Asia-Pacific chief operating officer, said he expected double digit annual percentage growth in staff numbers in Hong Kong and Asia, up to 2010 or 2011. The bank now employs 3,200 people in Hong Kong, out of a total of 18,000 in Asia-Pacific. Meanwhile,The Bank of New York Mellon, appointed Andrew Gordon, executive vice president, as head of broker-dealer and alternative investment services in Asia at the start of this year. Through its broker-dealer and alternative investment services business, the bank provider of government securities clearance services and tri-party collateral management services worldwide, and offers a wide range of services to hedge funds and other alternative fund strategies. A former head of international securities lending, Gordon was involved in the formation of the London securities lending desk in the early 1990's, in 1994 established the Hong Kong securities lending desk and associated client relationship and management functions. "The sheer wealth creation is extraordinary [in the region], presenting growth opportunities for us across the broad range of services we offer," said Certosimo, pointing out that the company has 15 offices in 10

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countries in the region, including full-service branches in Shanghai, Tokyo, Hong Kong, Singapore, Seoul, and Taipei. eSecLending has Asia Pacific expansion on their mind as well, with plans to open an office in Australia in 2008. Chris Jaynes, president of eSecLending, states “In 2007, we implemented our first client win in the region in New Zealand and we now are actively building momentum in Australia. To support this growth we will be developing a local presence in the country, which will allow us to grow and better service our lender clients and the Asia Pacific region more broadly. There is a significant and growing lender base amongst the sovereign wealth schemes and super funds throughout the Asia Pacific markets and we expect to see these beneficial owners increasingly treating securities lending as an investment decision.” The growing confidence of global asset service providers to expand in the Asian region is buoyed by developments that are gradually deepening the range of investible products available to both indigenous firms and foreign investment managers anxious to leverage Asia’s growth story. Among the most recent pronouncements that have long term repercussions on Asia’s securities lending market include that by India’s Securities Exchange Board of India (SEBI, which appears to have finally decided to allow short selling by institutional investors as of the end of the first quarter: though State Street’s Squillacioti sounds a note of caution as;“There is no activity as yet and the market is still awaiting a formal platform for securities lending.” Up to now, only individual investors in India are allowed to sell short in the cash market, betting that a stock will fall. With a view to provide a mechanism for borrowing of securities to enable settlement of securities sold short, SEBI, with the backing of the Reserve Bank of India (RBI), the central bank, has also been decided to put in place a full-fledged securities lending and borrowing (SLB) scheme for SEBI approved market participants in the Indian securities market. India’s various stock exchanges and depositories reportedly have been advised to put necessary systems in place in this regard. According to the broad framework announced by SEBI, short selling will be defined as selling a stock that the seller does not own at the time of a trade. Both retail and institutional investors, will be permitted to short sell. However, SEBI has made it clear that naked short selling will not be permitted in the Indian securities market and it will be mandatory for all investors to deliver securities at the time of settlement. Moreover, institutional investor will not be allowed to do day trading that is square off their transactions intra-day. The settlement cycle for SLB transactions will be on a T+1 basis and settlement of lending and borrowing transactions will be independent of normal market settlement. Additionally, the Reserve Bank of India has limited the impact of SEBI’s willingness to adopt an effective securities lending regime by capping the number of stocks eligible for lending at around 5% of the equity market: a move which reflects both the ambiguity of the Indian regulators’position on securities lending and the inability of the country to establish a workable platform. Consequently,“there’s no activity yet,”notes Squillacioti.

Nonetheless, India’s decision to relax rules on shortselling is also part of a larger Asian trend. For its top 50 stocks, Taiwan last year removed the so-called uptick rule, which is a restriction on shorting falling stocks. In Vietnam the State Bank moved in late January to relax strict rules governing collateral for securities lending (mainly bank loans, though the IMF had been voicing concern that the stiff rules governing collateral against the lending of securities had helped stymie a drooping stock market). In Malaysia meanwhile, short selling made something of a comeback in January last year. Regulated short selling of listed securities in Malaysia actually commenced on September 30th 1996. However, the move was short-lived as on August 28th 1997, less than a full year later, at the height of the so-called Asian financial crisis, the Securities Commission suspended securities borrowing and lending (SBL) in respect of securities listed on Bursa Malaysia. With renewed vigour, Bursa Malaysia chief executive Yusli Mohammed Yusoff reintroduced, albeit on a modest scale a Bursa SBL System for borrowing and lending for securities listed on the exchange at the beginning of last year. All securities listed on Bursa Securities are traded scripless through the central depository system established under the Securities Industry (Central Depositories) Act. The Bursa SBL System is a facility actually offered by Bursa Malaysia Securities Clearing in the role of a central lending agency. Bursa Clearing specifies the shares which are eligible to be borrowed, presently 70 counters. The borrowed securities may only be used for prescribed purposes. Only approved local licensed dealers may borrow securities from Bursa Clearing as principal on standard terms, subject to provision of collateral (of the permitted types) up to the required margin, which are valued subject to haircuts determined by Bursa Clearing. Any other person who wishes to borrow the eligible securities has to borrow them from a borrower under a contract to be negotiated between them. China is one of the holiest grails for the Asian securities lending market, and one where EquiLend’s Lamb stresses that: “it will continue to be a big story, though access to Chinese stocks is available via listings on other exchanges, but as the market gradually opens, there will be huge opportunity.” For the time being, irrespective of the limitations of various Asian markets, volumes of securities lent and borrowed continue to rise inexorably, even in a market stymied by credit contagion. “The resulting increased market volatility,” explains Lamb, “in the cash equity markets has resulted in lending volumes higher than we have ever seen. The highest volume day in our history was recorded last August and we continue to see elevated levels even now. Some of that will be normal growth in business, but some may not be. In some instances, it is demand driven in others event driven and then again in others seasonal factors come into play. In Japan, for example, dividend payments peak in March and September so you start to see correlations in volume developing. Either way, in Asia the only way is up right now.”

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COVER STORY: MF GLOBAL

If volatility helped dampen MF Global’s NYSE debut, it has also worked to the company’s advantage during its first six months as a public entity. Because the bulk of its vast income is derived largely through commissions for execution and clearing—in addition to markups on principal transactions and interest on cash accounts—the firm has benefited from the enormous instability and ensuing high volumes driving the markets of late. In short, says Davis,“it doesn’t really matter which way the markets move—so long [sic] as they do move.” Photograph © Meg380; supplied by Dreamstime.com, February 2008.

THE GROWING REACH OF

MF GLOBAL Its initial public offering was marred by a sell off, but the stock has held firm since and Kevin Davis, chief executive officer (CEO) of futures and options brokerage MF Global, is excited about the company’s prospects. Buoyed by the latest round of acquisitions and with volume and volatility boosting profit margins, Davis is confident that MF Global is particularly well-positioned to exploit increasingly favourable market conditions. Dave Simons reports from New York. HE CORNER OFFICE overlooking Fifth Avenue and 56th is decked out in well-trimmed business décor-rather befitting its occupant, London-born Kevin Davis, head of futures and options broker MF Global. On this bright sparkling morn, piles of financial papers are pushed aside to make room for a prim yet prime platter of

English digestive biscuits, complete with thick chocolate glaze.“You Americans knocking about with your Hershey’s Kisses, this is the real thing,”harrumphs Davis with a grin. Moments later, MF Global’s affable and urbane chief executive officer (CEO) hoists a cup of—naturally—Earl Grey tea and muses upon his company’s action-packed first six months as a public entity. “These are market conditions that typically favour our business,” says Davis, referring to the volume and volatility that is the bread-andbutter of the brokerage business.“The first part of the year has been quite good. I expect to see significant growth opportunities for us as we move forward.” Having spent his formative years in the commodities trade, in 1991 Davis joined the company then known as ED&F Man International, a division of Britain’s enormously powerful Man Group (the world’s largest publicly traded hedge-fund firm), where he specialised in interest-rate futures. In 1999 Davis was named CEO of Man Group’s

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global brokerage business, Man Financial, and over the next seven years he was instrumental in expanding the company’s futures, options and equity derivatives trade, while simultaneously boosting its client base of both institutional and private investors. When Man Group announced last spring that it would spin off its brokerage arm in an initial public offering (IPO) that some suggested could top $4bn, Davis was invariably tapped to lead the new company dubbed MF Global. He was joined by chief financial officer (CFO) Amy Butte, the former finance officer for the NYSE Group who helped engineer 2005’s milestone NYSE-Archipelago merger. Butte however departed in January and currently, chief administrative officer Ira Polk is serving as MF Global’s interim CFO. In the event, the spin out turned out to be a sub-par send off. Just prior to the company’s July 19th 2007 IPO, the credit markets suddenly came unglued, forcing Man to scale back its original float from a projected range of $36 to $39 per share, to $30 per share, resulting in a significantly more modest $2.9bn net. Despite earlier suggestions that the spin off would occur “subject to market conditions remaining favourable,”Peter Clarke, Man Group’s CEO, was the first to admit that their timing was not perhaps the greatest. "We were trying to sell into an environment of weakness," acknowledged Clarke, while maintaining that the reason for the float was“strategic, not financial.” While MF Global’s shares have since shown signs of resilience (and have managed to outperform most other 2007 financial IPOs), the company has had to endure other slings and arrow, including a $77m settlement involving claims that while operating as Man Financial the company failed to properly supervise accounts used by Philadelphia Alternative Asset Management Co., a hedge fund subsequently found to have been involved in allegedly fraudulent trade practices. To date investors have for the most part remained cautious, even when the numbers have looked quite good. For the three months ending December 31st 2007 MF Global recorded adjusted income (excluding expenses associated with the spin-off) of 37 cents per share—a full three cents ahead of expectations—on total revenues of $1.33bn, fueled by a whopping 47% leap in trading volume to 495.8m contracts. Despite the positive indicators, MF Global’s stock sank 5% on the news. Not that CEO Davis is wringing his hands over the situation. From his vantage point Davis believes the company’s shares have held up “remarkably well,”considering the rocky start and ongoing turmoil. Most of all, he is confident that his company is particularly well-positioned to exploit the favorable market conditions.“The advantage of us going public when we did is that our shareholders got a chance to buy our stock at a much better value than would have otherwise been the case,” offers Davis. “Which represents a particularly good opportunity for our new shareholders.” A leading broker for exchange-listed futures and options, the Hamilton, Bermuda-based MF Global currently maintains a presence in 12 countries with listings on more

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For now, investors who are looking for a respite within the financial markets may find the relatively sane world of regulated commodities exchanges to be just the ticket.“It is true that people flock to central-clearing counterparties during credit crises,”maintains Davis.“I think it has been well proven that whenever the markets begin to tumble, the one place you can always get a price is in our industry. And right now, that’s a great attribute.” Photograph kindly supplied by MF Global, February 2007.

than 70 exchanges. Execution and clearing for exchangetraded derivatives comprise the bulk of the company’s business, which also includes over-the-counter (OTC) derivatives in addition to non-derivative foreign exchange products and cash securities. The company’s trading markets run the gamut from interest rates and equities, to currencies and a wide range of commodities such as energy and metals and agricultural issues. Europe accounts for 38% of MF Global’s net revenues, with another roughly 47% in the US and the remainder coming from Asia-Pacific. If volatility helped dampen MF Global’s NYSE debut, it has also worked to the company’s advantage during its first six months as a public entity. Because the bulk of its vast income is derived largely through commissions for execution and clearing—in addition to markups on principal transactions and interest on cash accounts—the firm has benefited from the enormous instability and ensuing high volumes driving the markets of late. In short, says Davis,“it doesn’t really matter which way the markets move—so long [sic] as they do move.” It would be an understatement to say that accretion is key to MF Global’s growth strategy. The company has 19 acquisitions to its credit dating back to 1989, which include recent pick-ups such as GNI, a leading broker of futures and options, as well as Refco LLC, a futures brokerage firm purchased at auction for a knockdown $300m or so (for assets valued at close to $1.25bn), after a series of allegations of improper behaviour resulted in the firm being

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put up for sale. Man Financial kept the majority of the Refco futures businesses after selling Refco Overseas Ltd (Refco's European operation) to Marathon Asset Management. Shortly after going public, MF Global also acquired Sydney-based BrokerOne, Australia’s largest online futures and options broker, giving the firm a regional foothold while nearly doubling the company’s post-IPO Asia-Pacific based revenue (MF Global believes the transaction will be accretive over the next 12 months). Moreover, at year’s end the company went shopping once more, this time landing ChoiceOdds, a UK-based financial binary trading firm and leader in the online retail market for binary products. The acquisition will allow clients to trade OTC products in place of listed equivalents using a single dedicated platform. A major proponent of streamlined trading solutions, Davis says the movement into binary products is indicative of a general evolution of the capital markets toward a more balanced playing field opposite retail market participants, one that requires less capital-intensive strategies while offering greater opportunities to profit. “ChoiceOdds has enabled us to broaden the products that we can offer to our European and Asia-Pacific customers,” says Davis.“Increasingly our customers are asking for newer and more innovative kinds of trading products, such as spreads, binaries, contracts for differences, and various other OTC derivatives. We feel that these kinds of acquisitions will help us to greatly expand our client base globally.” Approximately 10% of MF Global's net revenues in fiscal 2007 came from the Asia-Pacific markets, and that number is already on the rise, a reflection of the company’s growing business prospects in locations such as Tokyo, Hong Kong, Singapore, Taipei, Mumbai and Sydney. In addition to BrokerOne, last June MF Global acquired FXA Securities Ltd., a leading provider of online foreign exchange products in Japan. The company is in the process of rolling out FXA's technology outside of Japan, with the goal of providing a retail OTC foreign exchange platform to all of Asia Pacific and Europe. Davis says that the company plans to introduce as many as six additional businesses to the region in the near future.“By this time next year, I would expect our Asia-Pacific revenues to be in the neighborhood of 20%,”says Davis. When seeking acquisitions, Davis looks for a few basic criteria. “We want to know if it will expand our customer type, broaden our product line, and also widen our geographical reach,” he says. While transactions are often funded by underlying synergy savings, in some instances, the pick-up is strategic. “For instance, in the case of FXA, there was no cost-savings, because we didn’t already have a retail FX Asia-Pacific position prior to the transaction. BrokerOne, on the other hand, satisfied all the requirements—it expanded our geographical reach as well as our client type by giving us a dominant position with professional traders in that particular country. And there were huge synergy savings, because between us we had the two biggest back offices in Australia’s futures industry— now we only need one.” Due to ongoing demand in China and India, many

analysts continue to forecast a secular bull market in commodities until supply begins to address changes in demographics and global growth. While the possibility exists for institutions to unwind positions in order to raise cash as the liquidity crunch worsens or consumption is affected by a lack of investment and consumer demand, it is likely that sustained strong growth from the East will continue to support the market. All of which if good news for the likes of MF Global, particularly as the globalderivatives market continues to take shape. “There’s no question that as this industry has evolved, our business has evolved with it,”says Davis. Going forward, he adds,“We will continue to use our scale to bring down costs to make it easier to compete. Additionally, we’ll continue to look for acquisition opportunities that meet one or more of the criteria we have for executing these deals. And we’ll also continue to be at the forefront of rolling out new and innovative products that our European and Asia-Pacific client base is demanding.” Whether MF Global’s engines can continue to run smoothly may depend on a number of factors. High volume is key to the company’s growth, though the markets may not be able to sustain current levels of transactional activity should conditions begin to moderate. While MF Global’s income stream has been well served by higher interest rates over the past several years, the Federal Reserve Board’s recent reversal may pave the way for a more challenging environment in the future. The potential for increased competition and reduced margins within the futures-andoptions business is yet another variable, say experts, particularly as the rapidly growing sector continues to evolve. For the time being, however, Davis does not consider competitors such Newedge and Interactive Brokers an immediate threat to MF Global‘s long-term viability. “While we have specialist-type rivals in most aspects of our business by product or by region, there is no single company that rivals us across the board,”he says. Nor does Davis view any potential shift in trading styles or rules and regulations as obstacles to future growth.“Our business has been changing for many years,” he says,“and up until now we have managed to always chart a course that has enabled us to benefit from all the changes that have taken place, and we believe that will continue.”The bottom line, says Davis, is that “any news is good news, no matter whether it is bad or good.” Even the reduction in interest rates has translated into a wealth of business, notes Davis. “There was an enormous shift in our customers’ positions, and every other day it seems there are new expectations, and all of it is good for us and good for driving volumes.” For now, investors who are looking for a respite within the financial markets may find the relatively sane world of regulated commodities exchanges to be just the ticket.“It is true that people flock to central-clearing counterparties during credit crises,” maintains Davis. “I think it has been well proven that whenever the markets begin to tumble, the one place you can always get a price is in our industry. And right now, that’s a great attribute.”

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The bonds of the big, highly rated banks, such as BBVA, La Caixa and Santander, are trading significantly tighter in the secondary market than those of the smaller institutions and the multi-seller issuers such as AyT (typically between 8 basis points (bps) to 10bps on bonds that have outstanding maturities of nine to ten years). “That is something we are beginning to see in the market that we didn’t see in the past,” acknowledges Stilianopoulos, though he says, “There [will be] more distinction between issuers in the future.” Photograph provided by Istockphotos.com, February 2008.

The credit crisis has hit Spanish covered bonds harder than most of their European counterparts. A dramatic widening of spreads on cedulas in the secondary market brought the guillotine down on any further new issuance in November, and market participants are uncertain how long the hiatus will last—and what the long-term impact on the instruments is going to be. Andrew Cavenagh reports. LTHOUGH SPAIN’S FIFTH largest banking group Bankinter did begin marketing a €1bn inaugural jumbo issue towards the end of January, leading bankers in the business were not convinced that it would find sufficient buyers for the deal. “There isn’t that much liquidity in the market any more. Demand isn’t huge, and right now I am not sure that you can bring a deal to the market successfully,” says Carlos Stilianopoulos, head of capital markets at Caja Madrid, Spain’s second-largest savings bank and the fourth biggest issuer of cedulas.

FTSE GLOBAL MARKETS • MARCH/APRIL 2008

Tim Skeet, head of bond origination at Merrill Lynch in London, says that it was difficult to make a sensible judgment on when the primary market for Spanish covered bonds will return. Wider liquidity issues in the financial markets are the likely cause of the dearth of investor appetite rather than any fundamental concerns about the credit quality of the instruments, which have remained robust, as has the supervision of the sector, he says. “In many ways we’re talking about an irrational set of reactions,” adds Skeet. “People are responding to loud headlines and not trying to understand the fundamentals of the fine print.” Despite mounting concerns about the Spanish property market, the rate of delinquencies in the mortgage pools that support cedulas hipotecarias remains well under 1%, and Stilianopoulos said that in the worstcase scenario the figure would rise to no more than between 1.5% and 2% by the end of this year. He points out that this would still be an order of magnitude below the level that would threaten the credit ratings of the bonds, given the huge over-collateralisation the instruments derive from being covered by the issuers’

DEBT REPORT: WIDENING SPREADS COULD TEMPT BACK BUYERS

the waiting game

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entire portfolio of eligible mortgages. “You would need to have something like 30% of our mortgages default,” he explains. Bankinter’s expected inaugural issue illustrates the extent to which cedulas investors can benefit from this overcollateralisation. According to Fitch Ratings, the bank’s pool of mortgages that were eligible for covered bonds totalled €5.58bn at the end of 2007. Given that the bank has issued only €267m of cedulas hipotecarias in the private market to date, this pool would offer buyers of the new bonds the security of collateral worth 348.8% of the outstanding cedulas issuance. Demand for cedulas has fallen away much more markedly than for some other European covered bonds notably the German, French and Nordic instruments simply because of the continuing lack of a significant domestic investor base for Spanish issuers. Spain’s banks have never been able to sell much more than 10% of a cedulas issue to domestic buyers, and this inevitably makes the market vulnerable in a period of wider financial stress. It is only natural for investors to retrench to home products that they know best in these circumstances; and require a substantial premium to buy anything else. “That has always been one of their big problems. maintains Skeet at Merrill Lynch. It is a shortcoming that means that Spanish issuers have little or no scope to turn to individually tailored domestic private placements, which offer their German and French counterparts a viable alternative when conditions in the public markets turn sour. In recent months, however, the Spanish banks have begun to target such issues at investors elsewhere in Europe.“We are doing private placements into foreign accounts, which is something we generally did not do in the past,”confirms Stilianopoulos at Caja Madrid.“For relative value investors, it is something that’s certainly worth looking at.” Another factor working against cedulas right now is that it is still a young market. Despite the size of its outstanding issuance, it has not yet reached the stage where a large volume of bonds are maturing to create “scarcity value” that might exert downward pressure on spreads. Compared with the €65bn of expected redemptions in the German pfandbrief market this year, for example, there will only be €4bn of cedulas hipotecarias and €2.5bn of cedulas territoreales (backed by public-sector loans) redeemed in 2008. Heiko Langer, senior covered bond analyst at BNP Paribas in London, says there will not be any appreciable squeeze on the supply of cedulas from redemptions for at least another two years.“That will only increase significantly in 2010.”What has clearly increased, however, since cedulas spreads began to widen sharply in September is the degree of investor discrimination between different issuers in a market where there had been virtually none up to August 2007. The bonds of the big, highly rated banks, such as BBVA, La Caixa and Santander, are trading significantly tighter in the secondary market than those of the smaller institutions and the multi-seller issuers such as AyT

Heiko Langer, senior covered bond analyst at BNP Paribas in London, says there will not be any appreciable squeeze on the supply of cedulas from redemptions for at least another two years. "That will only increase significantly in 2010." Photograph kindly supplied by BNP Paribas, February 2008.

(typically between 8 basis points (bps) to 10bps on bonds that have outstanding maturities of nine to ten years).“That is something we are beginning to see in the market that we didn’t see in the past,”acknowledges Stilianopoulos, though he says,“There [will be] more distinction between issuers in the future.” Cedulas territoreales, supported by public-sector loans, are also (unsurprisingly) trading tighter than the mortgagebacked cedulas hipotecarias, given the growing concerns about a slump in the Spanish housing market. Equally predictably, investors are favouring bonds with shorter maturities. “In the last few weeks the market has become increasingly fragmented,” notes Langer at BNP Paribas. “Investors are very selective and picky as to where they put their money,”he adds. While the outlook for Spanish covered bonds at the beginning of 2008 could hardly be less promising, market participants and analysts still expect to see anywhere between €30bn and €45bn of new issuance by the end of this year, as pressure grows on Spain’s banks to put fresh long-term funding in place. Their present tactic of issuing (and retaining) residential mortgage-backed securities (RMBS) for potential use as repo collateral with the European Central Bank may be a prudent short-term measure to ensure liquidity, but it is not a sustainable funding strategy in the long term. The extent of this “hedging” has been spectacular. Moody’s reported in January that Spanish banks had issued €53bn of RMBS in the fourth quarter of 2007; some €14bn more than in the comparable period of the previous year) and sold virtually none of the securities to outside investors. This “internal securitisation” offers the ability to obtain repo funding with the ECB because RMBS can be pledged as such collateral with the central bank whereas mortgage loans cannot. But actual use of it has been light so far, as

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Spain continues to account for just 10% of the ECB’s auctions.“Most of the banks have used the repo facility, but to a very small extent,”explains Stilianopoulos.“But why not have it there in reserve as a cushion.”Once the banks start to look for long-term mortgage funding rather than shortterm liquidity insurance, however, they are sure turn back to covered bonds particularly as the Basel II capital accords (which came into effect in January) have diminished the regulatory capital advantages of securitisation. Given the current dislocation of the market, however, it is not surprising that the estimates for the level of new cedulas issuance in 2008 vary widely. Skeet at Merrill Lynch is at the bullish end of the scale. He believes the Spanish banks could end up issuing up to €40bn of covered bonds in 2008 against last year’s total of €35bn if the market comes back reasonably quickly. While the instruments will certainly be a more expensive source of funding than in the past, he says this should be kept in perspective compared with spread movements in the senior unsecured and asset-backed markets. “Relative to historical levels they are more expensive than they used to be, but everything is relative,” he adds. Stilianopoulos at Caja Madrid conservatively expects up to €30bn of issuance this year, with the caveat that“it really does depend when the market re-opens”. Langer at BNP Paribas meanwhile predicts issuance volumes in the region of €35bn, in the absence of any significant movement in spreads over the first few months of the year. Langer notes that in the more discriminatory market for cedulas , it will likely be one of the large, more highly rated banks that will kick-start the primary market once more with a shortdated issue of smaller size than the jumbo deals of recent years. However, he does say that some of the smaller and lower-rated issuers might struggle to launch deals in 2008. “I think there are definitely some issuers out there for whom it will be easier to tap the market than others.” Stilianopoulos agrees, saying that first-time issuers will face a particularly tough challenge as “Name recognition now is very important.” When the primary market re-opens and re-sets cedulas pricing, there is likely to be a flurry of activity in the secondary market as investors hunt for bargains. Current spread levels offer great value for triple-A rated investments; which, as Skeet pointed out, have yet to be subject to a ratings downgrade or other credit event. Once a few new issues give investors sufficient confidence that they will not be stuck with mark-to-market losses (because spreads have widened further), a rush of US-style “vulture fund” buying is likely to ensue. “There will be a sentiment shift, and the early birds will get in and fill their boots,”says Skeet. At the same time, because of the supply-demand balance and continuing concerns about the Spanish property market cedulas will continue to trade at a wider premium to their German, French and Nordic counterparts. In that case, they could very well start attracting a new breed of investor. “What we have not seen yet is a widespread expansion of the underlying investor market,” adds Skeet.

“[However, since] there has been a little bit of widening of spreads, that may bring some new investors to the table.” Certainly, cedulas hipotecarias should offer their investors stronger legal protection from some point later this year, when the amendments to the Spanish Mortgage Market Law that the country’s parliament passed in November 2007 come into play. The amended law has not changed the fundamental principle of the Spain’s legal framework for covered bonds—that the entire pool of a bank’s eligible (non-securitised) mortgages acts as the collateral for its cedulas issues—but it has tightened up the rules in two respects. One change has reduced the total amount of bonds a bank can issue to 80% of the value of this cover pool rather the 90% limit that has been the case up to now. The other lowers the loan-to-value (LTV) ratio for eligible non-residential mortgages to 60% from 70%. Other amendments extend the scope of qualifying loans to properties throughout the EU, permit the substitution of assets up worth up to 5% of the outstanding balance of issued cedulas , and allow financial derivatives to form part of the cover pool. “The changes we have had are very positive for the cedulas holders, if not necessarily the issuers,” explains Stilianopoulos. “You have a lot more security behind the cedulas .” The rating agencies also highlight the change that will oblige issuers to maintain an internal cover register of eligible and ineligible asset, which they said would improve the transparency of the pools considerably. Moody’s, which rates the bonds of 15 Spanish issuers (11 single institutions and the four multiple issuers) said the amended law would also enhance the timely payment of interest and principal on cedulas in the event of an issuer default.

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Germany’s pfandbriefe, Europe’s the oldest covered bond market, has proved the most resilient in the face of the global credit crunch. Although an inevitable investor flight to “ultimate” quality has seen the pricing differentials between the instruments and German sovereign bonds (bunds) widen to record levels, their spreads have remained comfortably inside those of most other European covered bonds. Moreover, there is still strong demand for new offerings. Andrew Cavenagh reports.

The day after HSH’s successful launch, Deutsche Postbank aroused even greater investor interest in an inaugural €1.5bn issue out of the €15bn programme that it has set up to diversify its sources of funding away from retail deposits. There were 89 bids for the five-year bond, and they came from investors in 15 countries, led by German, Nordic, Benelux and French buyers.“We closed the book in less than two hours, with orders in excess of €2bn,” says Menko Jaekel, co-head responsible for pfandbrief origination in the debt capital markets financial institutions group at BNP Paribas, joint book-runner on the deal. "Currently investors feel very confident with the strength that pfandbriefe are showing." Photograph supplied by Istockphotos.com, February 2008.

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DEBT REPORT: RESILIENT PFANDBRIEFE D

PFANDBRIEF: ON THE MARK STABLISHED PFANDBRIEF ISSUERS consider that the strength of the German covered bond market in adversity vindicates their concerted strategy in recent years to control the supply of jumbo bonds (issues of €1.5bn and over) unlike some of their counterparts in other jurisdictions. “We believe that issuers in the market have been very prudent to ensure there is a strong demand for the product,” said Franz-Josef Kaufmann, head of capital markets funding for the largest issuer Eurohypo and its parent Commerzbank. The German banks put the widening of pfandbrief spreads against bunds down to the greater liquidity and solidity of the latter at a time when liquidity concerns are paramount in investors’ minds, and they remain confident the gap will narrow once some equilibrium returns to the wider debt market calms down. “Generally, much more important for issuers is the spread widening between the secured and the unsecured markets,” maintains Sascha Aldag, head of treasury at WL Bank. While pfandbrief spreads remain close to swaps, senior unsecured debt at the double-A level is hovering around 70-80 basis points above the benchmark. From WL Bank’s point of view, he said a stable pfandbrief spread was much more important as the unsecured market provides just 8% of its funding.

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It is a consideration that may well persuade others to class,” remarked Jochen Friedrich, the member of HSH switch the balance of their funding. “For some issuers, Nordbank’s board who is responsible for the capital pfandbriefe could become potentially a lot more attractive markets. Friedrich says the success of the issue has than they were a few months ago,” observes Kaufmann. encouraged the bank to believe that jumbo ship pfandbriefe German covered bonds have also performed better in the would continue to provide the bank with an alternative debt crisis than those in virtually all other European source of funding in future. Moreover, he thinks any jurisdictions, where spreads to swaps have widened subsequent issues might well be dollar-denominated to significantly in some cases—notably on Spanish cedulas target investors in the Middle East and Asia. The day after HSH’s successful launch, Deutsche and the United Kingdom structured instruments. In late January, for example, Banco Santander’s €3bn issue, which Postbank aroused even greater investor interest in an matures in June 2014, was trading at 21.3 basis points (bps) inaugural €1.5bn issue out of the €5bn programme that it over the benchmark, while Nationwide’s €2bn bond has set up to diversify its sources of funding away from retail deposits.There were 89 bids for the five-year bond, and they (maturing a year earlier) was further out at 32.9bps over. “The market is proving to be an island of stability in came from investors in 15 countries, led by German, Nordic, these [difficult] times,”says Holger Dohra, head of business Benelux and French buyers. “We closed the book in less relations management on the treasury side of DG than two hours, with orders in excess of €6.2bn,” says Hypothekenbank. As the wider credit concerns have Menko Jaekel, co-head responsible for pfandbrief focused the attention of rating agencies and investors on origination in the debt capital markets financial institutions the legal frameworks behind the various covered-bond group at BNP Paribas, joint book-runner on the deal. jurisdictions, says Dohra, the track record and “Currently investors feel very confident with the strength that pfandbriefe are dependability of the showing.” pfandbrief regime has For the former state come to the fore.“From post office bank, which that perspective, the “For some issuers, pfandbriefe could only obtained its pfandbrief is certainly become potentially a lot more attractive than pfandbrief licence from among the first the German financial [instrument] they they were a few months ago,“ observes regulator Bafin on the would choose,” Dohra Kaufmann. German covered bonds have also 19th of December 2007, explains. “Its legal performed better in the debt crisis than the strength of the background is one of those in virtually all other European international demand the best you can get.” jurisdictions, where spreads to swaps have for the issue would Another helpful have been highly factor for the widened significantly in some cases—notably encouraging. Domestic hypotheken pfandbriefe on Spanish cedulas and the United Kingdom investors accounted for backed by mortgage structured instruments. In late January, for just 36% of the bonds, a loans is that the example, Banco Santander’s 3 €bn issue, percentage that German housing which matures in June 2014, was trading at suggests the giant retail market remains stable 21.3 basis points (bps) over the benchmark, bank will have little and is not subject to the difficulty in selling the fears of a crash that while Nationwide’s 2 €bn bond (maturing a one or two jumbo currently prevail in year earlier) was further out at 32.9bps over. issues a year that it Spain and the UK—to plans. “If it’s below the severe detriment of 40%, that’s a really nice all mortgage-backed signal to the market,”thinks Jaekel. securities in both countries. This then is clearly a growing trend. Eurohypo sold 53% The continuing strength of investor appetite for the instruments was evident at the beginning of this year, when of its last €.5bn jumbo issue to foreign investors in HSH Nordbank launched the first jumbo pfandbrief in November, and Dohra says such buyers have accounted for history to be backed by ship loans on January 8. The a larger share of DG Hypotheken’s recent issues, as covered originating bank and its joint lead managers, Deutsche bonds became familiar to investors in more and more Bank and HSBC, were able to close the book on the €1bn countries. “This is very much in line with what we have issue after less than two hours; by which time the deal was experienced—that the international investor base is still three times oversubscribed. The two-year bond paid a growing.” Dohra adds that international demand for 4.25% coupon priced flat to swaps, and 30% of the issue pfandbriefe should intensify further, as the overall level of was sold to non-German investors in Europe and Asia— new issuance (along with the size of individual issues) from much to the delight of the originator. “We are especially established market participants continued to decrease.“You pleased about foreign investors’ interest in this new asset have had less supply from Germany recently than you have

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had in the past, and it is increasingly difficult for investors to get a sufficient supply from German issuers,”he insists. “The pfandbrief jumbo issue sizes are shrinking, so therewith we have a natural increase in demand—in contrast perhaps to the Spanish cedulas, for example,” confirms Jaekel at BNP Paribas. A high anticipated level of bond redemptions in the jumbo market this year will exacerbate this squeeze on supply and should ensure that the spreads on pfandbriefe at tight levels. Jaekel also says issuers were expected to redeem €65bn of jumbo bonds in 2008 (€50bn of them backed by public-sector loans and the remainder by mortgages) while the level of new jumbo issues would struggle to amount to half this figure. “We expect to see new issues in the area of €30bn to €35bn.”This would suggest that volume of outstanding jumbo issues will drop from the from the €312bn recorded by the Association of Pfandbrief Banks (Verband Deutsche Pfandbriefbanken) at the end of 2007 to around the €280bn mark by December 2008: still a hefty chunk of change in an otherwise difficult global environment. “It is likely that the net issuance will be negative,” says Christian Walburg, deputy head of communications at the VDP. But he declined to put a figure on the likely overall drop at this stage, given the uncertainty about what a

Holger Dohra, head of business relations management on the treasury side of DG Hypothekenbank. As the wider credit concerns have focused the attention of rating agencies and investors on the legal frameworks behind the various covered-bond jurisdictions, says Dohra, the track record and dependability of the pfandbrief regime has come to the fore. "From that perspective, the pfandbrief is certainly among the first [instrument] they would choose," Dohra explains. "Its legal background is one of the best you can get." Photograph kindly supplied by DG Hypothekenbank, February 2008.

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simply pfandbrief simply good 6VgZVa 7Vc` 7VnZgcA7 7Zga^c =ne 8DG:6A8G:9>I 76C@ 9Z`V7Vc` 9ZjihX]Z =ned 9ZjihX]Z HX]^[[hWVc` 9Zm^V @dbbjcVaWVc` 9< =NE 9 hhZaYdg[Zg =nedi]Z`ZcWVc` :hhZc =ne :jgd]ned =VbWjg\Zg HeVg`VhhZ =ZaVWV AVcYZhWVc` =ZhhZc"I] g^c\Zc =H= CdgYWVc` =ned GZVa :h i Vi Z 7Vc ` =ne d GZVa :h i Vi Z =daY^ c\ = n e d GZ V a : h i V i Z 7V c` >ci Z g cV i ^ dcV a = n e dKZ gZ ^ ch W V c` >@ 7 9 Z ji h X ]Z > c Y j hig ^Z W V c ` @ gZ^ hheVg`Vh h Z @ ac A 77L B c X] Zc Zg = n e C D G9 $ A 7 Edh i W V c` H V X ]h Z cA 7 H:7 H e V g ` V h h Z @ a c7dcc K6ADK > H 7 6C @ 6HHD8>6I>DC D; <:GB6C E;6C97G>:; 76C@H LVgWjg\=ne LZhiYZjihX]Z >bbdW^a^Zc7Vc` LZhiA7 LA 76C@ L hiZcgdi 7Vc`

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number of prospective new issuers might do. Jaekel explains that this was the reason for the €5bn range in the BNP Paribas forecast: it was just impossible to know how many of these new entrants would actually be active in the jumbo market. “We have seen further new issuers lining up, and it depends how active they are going to be,”he says.“In addition, the activity in the jumbo market in 2008 will depend on how successful German banks continue to be in raising liquidity from private placements—such as medium term notes (MTNs) in covered format and registered pfandbriefe.” The banks have certainly been making a lot more use in recent months of the private markets, which still offer a cost-effective alternative—particularly when the public debt markets are going through a period of upheaval. Walburg confirms that VDP’s members had been tapping this source to a greater extent in recent months, although no figures were available. “Pfandbrief banks have reverted strongly to the traditional pfandbrief market,” he notes. Aldag meantime confirms that the private market would continue to provide about 80% of WL Bank’s funding in 2008.“We will do some more mortgage-backed issues this year, but private placements not jumbo issues,”he said.“The jumbo issues are a little bit more expensive than private placements at the moment.” Private placements are largely restricted to domestic investors, however, which gives issuers who want to expand their investor base beyond Germany’s borders an incentive to maintain a presence in the jumbo market—even at a slight premium. WL Bank plans to launch one jumbo transaction backed by public sector loans this year (as it had done every year since 2000) for this reason. Aldag says between 80% and 90% of the bonds it issued through private placements typically went to domestic investors. The extent to which new issuers compensate for a decline in the output of existing participants remains to be seen, but it is unlikely to be that dramatic. While Walburg holds that the VDP (whose 34 members account for about 95% of outstanding pfandbrief bonds) “was upbeat that we will have some new members by the year end”, there will probably be no more than two or three. The Postbank licence was one of only two new ones that Bafin issued last year (to take the total number of licensed issuers to 63), and a spokesman for the regulator said he not aware of any further applications currently under consideration. The consolidation that is currently underway in the German banking sector is also likely to take out some more of the historical issuers, following Commerzbank’s decision to merge Essen Hyp with its larger Eurohypo business from the beginning of this year to bring its public-finance operations together into a single entity. “There is a lot of restructuring going on now in the German banking industry,” commented Dohra at DG Hypothekenbank. “While there are opportunities for some new names to appear, you may also lose an existing name or two.” It is possible, however, that the nine remaining landesbanks may start to make more use of pfandbriefe for funding purposes in 2008, as the pre-funding they put in

Sascha Aldag, head of treasury at WL Bank. “Generally, much more important for issuers is the spread widening between the secured and the unsecured markets,” maintains Aldag. While pfandbrief spreads remain close to swaps, senior unsecured debt at the double-A level is hovering around 70-80 basis points above the benchmark. From WL Bank’s point of view, he said a stable pfandbrief spread was much more important as the unsecured market provides just 8% of its funding. Photograph kindly supplied by WL Bank, February 2008.

place before the expiry of their sovereign guarantees in 2005 continues to run down. “They are expected to issue more heavily as the pre-funding decreases,”comments Walburg at theVDP.“Analysts certainly expect them to resort increasingly to pfandbriefe in the medium term.” Meanwhile, the VDP itself has submitted proposals for amending the Pfandbrief Act that came into force in 2005 to the Ministry of Finance. Among the amendments proposed by the VDP, a key proposal addresses the liquidity risk in cover pools through the inclusion of sufficient cash or highly liquid investments to cover 90 days’payment of interest and principal on the bonds, and the inclusion of fire-insurance policies on real estate in cover pools. Another suggestions is to extend the product offering with a fourth class of bond backed by aircraft loans. Henning Rascher, theVDP’s president, says that the inclusion of aircraft loans as eligible pfandbrief collateral would boost the prospects of the German banking sector in global aircraft finance and—by doing so—strengthen German’s position as a world finance centre. Not all are convinced, however, that instruments backed by aircraft loans will be a significant addition to the market. Dohra at DG Hypothekenbank points out that the search for others assets to back pfandbrief issuance was an ongoing process. Moreover, while aircraft loans have been under consideration for some time he remains sceptical that prospective issuers will have loan portfolios large enough to provide the asset class with the required liquidity.“What is a more important consideration for me is who would be the issuer of such a loan.” Kaufmann at Eurohypo says the crucial consideration is that any new asset class of supporting collateral would not weaken the reputation of the pfandbrief regime. “That is certainly understood by all the parties involved and is critically important in the current market environment.”

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THE OFFSHORE SPECIALISTS As the global stock market landscape coalesces and changes shape, the role of offshore exchanges is in the spotlight. Undoubtedly, stock markets both onshore and offshore across the globe are in for a tumultuous ride this year. A dearth of liquidity is expected to impact the volume of new listings and product development. The volatile conditions, though, have not stopped the exchanges from marketing their wares, honing their offerings and working on new services. Lynn Strongin Dodds reports.

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Photograph supplied by istockphotos.com, February 2008.

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AURENT COLLET, HEAD of the Luxembourg capital market group at PricewaterhouseCoopers, notes, “It is very difficult to predict what the impact of the credit crunch will be on [offshore] markets. The Dublin and Luxembourg Stock Exchanges had record years in 2007 in terms of listing services. [Although] we see some uncertainty in the markets, we also believe that issuers and investors are going forward to benefit more and more from the transparency and liquidity of securities being listed on [offshore] stock exchanges.” Greg Wojciechowski, chief executive of the Bermuda Stock Exchange (BSX) adds, “We shall watch the developments caused by the global credit crunch with great interest as typically when the global capital markets are under pressure we see a slowing in new product origination. If this happens for products such as hedge funds, synthetic derivative products and structured products, it may put pressure on our international listing product.” Property funds are also in the spotlight. Tamara Menteshvilli, chief executive of Channel Island Stock Exchange (CISX), comments,“The credit crunch is changing the landscape and undoubtedly, we have seen the last of the collaterised debt obligations (CDOs). There has been a knock on effect on other asset classes and I think several property funds are holding fire until things settle down. Listings will not come to a standstill but only slowdown, as investors become more selective and risk averse.” Inevitably, structured investment vehicles (SIVs) will remain under pressure given the spate of bad news dogging the product over the past six months. The Irish Stock Exchange has been already affected. Three of its listed SIVs—Rhinebridge, Cheyne Finance and Mainsail—have reportedly been in difficulty due to exposure to sub prime loans. While this has drawn some critical focus on Ireland’s regulatory regime; many bankers concede and vociferously argue that the exchange is not to blame; as rules governing the regulation of these listed funds are decided at the European Union (EU) and not the national level. Against this shifting and uncertain background, stock exchanges of all sizes and shapes will have to prove their mettle. It is a crowded field and competition will only intensify thanks to Regulation NMS in the US and the Markets in Financial Instruments Directive (MiFID) in Europe. The regulations are expected to lead to proliferation of new electronic exchanges as well as consolidation among the more established exchanges. Various configurations are being touted, but for now, it is thought that offshore exchanges will be left out of any new blueprint. The focus, instead, will continue to be aimed at the larger bourses and as in any industry, the playing field is expected to fracture into the niche players and a small but influential group of heavyweights. The past two years has already seen NYSE Group Inc. which operates the New York Stock Exchange, buy Euronext for €16bn, while the London Stock Exchange recently spent over €1.5bn to purchase Borsa Italiana. This year, Nasdaq is poised to takeover OMX, the pan Nordic

Tamara Menteshvilli, chief executive of Channel Island Stock Exchange (CISX), comments,“The credit crunch is changing the landscape and undoubtedly, we have seen the last of the collaterised debt obligations (CDOs). There has been a knock on effect on other asset classes and I think several property funds are holding fire until things settle down. Listings will not come to a standstill but only slowdown, as investors become more selective and risk averse.” Photograph kindly supplied by the CISX, February 2008.

exchange for about $3.7bn. According to Collet, the trick to a prosperous future for an offshore exchange lies in its ability to carve out a distinguishable expertise in specific securities and services such as the listing process, information dissemination or the initial public offerings of companies, for example, from developing countries. “I believe there is a place in the world for niche exchanges. For example, smaller and medium companies may find it more effective and cost efficient to do an initial public offering (IPO) on a smaller exchange. However, it is important for these exchanges to specialise and offer a complementary platform and products to the larger exchanges,”he adds. Moreover, offshore exchanges are themselves keen to gender investor confidence by ensuring that they meet all international standards and garner appropriate recognitions. Among the latest moves by the BSX is the exchange’s recent successful application to join America’s Central Securities Depositories Association (ACSDA). The importance of membership is clear to Bermuda. “It emphasises that the BSX and Bermuda operate a modern clearing, settlement and depository service, thus underscoring that it is a mainstream exchange, rather than a listings exchange service provider,” notes Wojciechowski. He stresses that it is not a one-way street though:“BSX will bring a new angle to ACSDA as we are a relatively new exchange, a new capital markets region and will have a different or unique perspective that more traditional national exchanges and clearing entities may have.” In the meantime, BSX is also following up formal recognition from

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Canada’s department of finance to add the exchange to its anything structurally different between the BSX and our onshore counterparts. The foundation of the BSX is based list of proscribed foreign stock exchanges. Collett would also,“not be surprised”to see other offshore upon the same fundamental regulatory and operational exchanges follow the lead of Dublin and Luxembourg and principles as those of onshore markets. Our function and form alliances with bigger brethren”. Dublin recently responsibility in respect of the domestic capital market is the extended its seven year technology collaboration with same (regulation, investor protection, capital raising, Deutsche Borse in equities trading and clearing until 2012. aftermarket and operational support services). The Last year, Luxembourg Stock Exchange and Euronext struck differentiating factors that place the BSX in a unique position a partnership whereby securities listed on Luxembourg are of importance and will continue to make it relevant on the made available on the NSC, the pan-European trading global stock exchange landscape are Bermuda’s platform used by all Euronext cash markets. That means geographical position between two of the world’s deepest Euronext members have access to the nearly 40,000 capital markets; a robust and progressive insurance market, instruments traded on the Luxembourg Exchange, its unique and internationally recognised regulatory including 29,000 bonds issued by more than 4,000 entities framework and a fully deployed electronic stock exchange in over 100 countries. Last year, the exchange added 13,352 platform capable of supporting the trading of international securities.” In other words, new securities to the he is intimating that issuers official list, against 10,547 benefit from both in 2006. Bonds Moreover, offshore exchanges are regulatory rigour as well as represented the largest the economic benefits of component followed by themselves keen to gender investor being in a dollar Luxembourg investment confidence by ensuring that they meet denominated jurisdiction. funds, warrants and global all international standards and garner Luxembourg and depositary receipts. appropriate recognitions. Among the Dublin, on the other hand, Euronext will also adopt latest moves by the BSX is the believe they have the upper the SAGE services and exchange’s recent successful application hand because they are listing tools used by the subject to the same long list Luxembourg market for to join America’s Central Securities of European Union rules the listing of corporate Depositories Association (ACSDA). The and regulations, which debt instruments. Later in importance of membership is clear to should provide investors the year, the two expect to Bermuda. “It emphasises that the BSX with extra comfort. Both create the European and Bermuda operate a modern countries are also home to Economic Interest thriving fund management Grouping, in order to clearing, settlement and depository and administration develop LuxNext; a service, thus underscoring that it is a communities. As Grignon shared standard for listing mainstream exchange, rather than a Dumoulin, points out,“The and trading corporate listings exchange service provider,” level of our regulation is bonds. Finally, the notes Wojciechowski. parallel to the London Luxembourg Stock Stock Exchange because Exchange plans to we have to comply with implement a straight through processing (STP) model and offer central European Union [regulations]. This is not the case with, for example, the Bermuda Stock Exchange. One of the challenges counterparty services for the most liquid securities. Despite their recent bond, both groups stress that there today is that issuers have to maximise every item of the are no plans to merge the two businesses. According to process and as a result they may choose to list in Luxembourg Hubert Grignon Dumoulin, vice president securities and but trade in London because we offer an efficient and cost issuers at the Luxembourg Stock Exchange: “We plan to effective listing service.” Roseanne Kelly, head of investment remain independent but we also think it is important to fund listing at the Irish Stock Exchange, also believes that the have a strong relationship with one of the larger entities. We comfort of EU legislation as well as development of industry are not competing but finding ways to complement each best practice gives the ISE the edge over its competitors. “For other’s businesses.”The deal also underscores the increasing example, in the hedge fund industry, we work closely and global reach of not only Luxembourg but also the other continually with global funds to codify best practice. It is quasi-regulation in that there is a set of conditions that a fund offshore exchanges. In fact, the Grand Duchy as well as others often bristle at must satisfy in order to list. It is principle based rather than being called offshore. They all agree that the way to remain rules based. Also, we have a constant flow of information that competitive and generate sustainable revenue is to not only we disseminate on the fund which is available on our website cater to their domestic clientele but also build an while additional pricing data is available through news international presence. As Wojciehowski notes,“ I do not see sources such as Reuters and Bloomberg.”

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22-25 April 2008 • The CNIT Centre, Paris

0 r 30 ide Ove buy s ady ior alre sen dees ed n rm atte confi

Leading Sell Side & Industry Speakers Eli Lederman CEO, Turquoise shares insight into the future of execution venues

Leading Buy Side Speakers

Whether you prefer intimate indepth discussion or industrywide networking sessions, the program for TradeTech 2008 has been devised to enable you to tailor your experience… YOU decide what to attend – from the keynote plenary sessions on global trends, to exclusive buy-side only roundtable discussions on the issues closest to your heart.

Stavros Siokos Global Head of Electronic Execution Sales, Citi

I attend TradeTech because…

DnB Nor Asset Management

discusses how you can access and attract liquidity in the new trading landscape

discusses where the empowerment of the Buy Side might lead

Pierre C. Rousseau

“…the outstanding agenda is sure to deliver insight into the latest developments in our industry”

Johan Eriksson Head of Global Dealing,

Daemon Bear, Head of Dealing, JP Morgan Asset Management discusses the merits of OMS and EMS

Richard Lacaille CIO, SSgA

Global Head Of Equity Brokerage, BNP Paribas projects the future of equity trading

Thomas M. Joyce Chairman & CEO, Knight Capital

examines the potential of 130/30 funds

details the lessons Europe can learn from the U.S. marketplace

Caroline Taylor

David Wright

Global Head of Active Equity Trading, Goldman Sachs Asset Management

Director of Financial Services Policy and Financial Markets, European Commission

conducts a post-MiFID post-mortem

updates us on European financial regulation

Richard Lacaille, CIO, SSgA

“…TradeTech is the must-attend event of the year” Daemon Bear, Head of Equity Trading, JPMorgan Asset Management

“…I want to contribute to shaping the future of trading” Alexander Kuppler, Head of Equity Trading, Deutsche Asset Management & DWS

www.tradetechequity.eu Lead Sponsor:

Principal Sponsors:

Call +44 (0)20 7368 9465

Email: hannah17@wbr.co.uk

Organised By:

Visit www.tradetechequity.eu 31/1/08 07:37:10

GM EDITORIAL 24.qxd:Issue 24

OFFSHORE EXCHANGES: GAINING A COMPETITIVE EDGE 94

19/2/08

18:08

Page 94

Although current market conditions may prove challenging, Kelly sees hedge funds exploiting other opportunities. As she puts it, “hedge funds thrive on volatility and although strategies based on equities will have difficulty this year, we are seeing listing documents tied to different types of hedge fund strategies such as emerging markets.” Long short funds are also expected to grow in popularity and F&C Alternative Investments kicked off 2008 by listing F&C Zircon, a systematic European long short equity trading fund, on the ISE. F&C Zircon joins F&C Tourmaline Fund, a fixed income strategy, and the F&C Garnet Fund, a forex volatility and forward-rate bias trading fund, both of which listed on the ISE over the past 12 months. Last year, the ISE held onto its lead in the investment fund realm, with the number of new funds and sub-funds listing rising 11% to 10,200 from 2006 figures. The final tally for the year of new debt issuers came in at 984. While the fourth quarter saw a healthy flow of 154 new funds/sub-funds being listed, debt issuance slackened to 166 due to the sub prime crisis. Looking ahead, Kelly says the exchange will continue to work with their clients, improve their products and services, and look at further opportunities. Market participants are also expecting Deidre Somers, who took over the helm from Tom Healy this past June, to implement other changes although it is still early days. For now, plunging equity markets may be dominating her attention as the ISE had the dubious distinction of being one of the worst performing stock exchange in Europe last year. As for other exchanges, Cayman will continue to try to make inroads into the ISE’s hedge funds listing business while Bermuda plans to take full advantage of its designations from the UK’s FSA and HMRC. “Both designations are extremely important for the BSX and for UK market participants and issuers,”says Wojciechowski. “The designation from the FSA speaks to the acceptability of the regulatory regime of the BSX,” he explains, adding that: “In relation to the HMRC, BSX recognition should be of particular interest to the global debt and structured finance markets in addition to PEP’s and SIP’s in the UK.” These designations,“coupled with others that have been granted to the BSX, help pave the way for the plans the BSX has to provide an offshore stock exchange alternative for those issuers that are seeking a conveniently located venue for the listing, trading and settlement of their securities closer to the North American time zone,”he adds. In 2008, the BSX will also continue to develop innovative services such as its Mezzanine Market—a pre-IPO listing for fledgling, high growth potential companies. There are also plans to continue to develop its listing business across the asset class range including hedge funds, debt, euro-debt structured products and synthetic derivative products. In addition, the exchange hopes to play an important role in supporting the convergence of the insurance and capital market industries in the Bermuda and providing an aftermarket for products created. Tamara Menteshivilli, at the CISX, also believes the

Hubert Grignon Dumoulin, vice president securities and issuers at the Luxembourg Stock Exchange, “We plan to remain independent but we also think it is important to have a strong relationship with one of the larger entities. We are not competing but finding ways to complement each other’s businesses.” Photograph kindly supplied by the Luxembourg Stock Exchange, February 2008.

Channel Islands’ exchange has a firm place in the financial landscape. CISX which will mark its tenth anniversary this year, is typically used for the listing of a range of alternative fund structures, including property and hedge as well as private equity funds. It also lists“the alternative alternatives including wine, forestry and carbon funds. CISX made its name as being one of the first exchanges to allow the listing of interests in limited partnerships. Moreover, it offers a tax-efficient way for UK private equity firms to finance acquisitions. Over the past four years, issuers in England and Wales have been responsible for more than £30bn in debt listings on the CISX. According to Geoff Cook, CISX’s main advantages are that its cost effective, efficient and flexible service. As it is outside the EU realm, there are no requirements to prepare accounts according to International Financial Reporting Standards, with tends to add another layer of cost and complexity. Instead, issuers have the choice to use US or UK Generally Accepted Accounting Principles. “The CISX offers a low cost alternative to investing on one of the larger exchanges. About half of the listings are from outside the jurisdiction. The real differentiation, though, is in the exchange’s personal service. They make every effort to have a fast turnaround and they are the only exchange I know of that meets daily to discuss listings,” adds Cook. Menteshivilli adds, “We offer a one stop shop starting from the prospectus to the listing itself. We work closely together with issuers to see how even the most innovative products might be eligible for a listing and how we can add value to that process.”

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

GM EDITORIAL 24.qxd:Issue 24

20/2/08

09:43

Page 95

Top 10 Equities By Daily Total Return

Top 10 Corp Bonds By Daily Total Return

Rank Stock description

Groupe Eurotunnel Sa

Fremont General Corp (7.875% 17-Mar-2009)

Alitalia - Linee Aeree Italiane Spa

Tekni-Plex Inc (12.75% 15-Jun-2010)

Wci Communities Inc

K Hovnanian Enterprises Inc (8.625% 15-Jan-2017)

Imergent Inc

Dollar General Corp (10.625% 15-Jul-2015)

Medis Technologies Ltd

Magnachip Semiconductor Finance Co (8% 15-Dec-2014)

Syntax-Brillian Corp

K Hovnanian Enterprises Inc (8.875% 01-Apr-2012)

InterOil Corp

Burlington Coat Factory Warehouse Corp (11.125% 15-04-14)

Globalstar Inc

Claire'S Stores Inc (10.5% 01-Jun-2017)

Cree Inc

Freescale Semiconductor Inc (10.125% 15-Dec-2016)

Ikb Deutsche Industriebank Ag

Sally Holdings Llc (10.5% 15-Nov-2016)

Equity by Fee > 10 < 100 Mln

Equity by Fee > 100 Mln

Rank Stock description

Groupe Eurotunnel Sa

Cree Inc

Alitalia - Linee Aeree Italiane Spa

Nutrisystem Inc

Wci Communities Inc

USANA Health Sciences Inc

Imergent Inc

Corus Bankshares Inc

Syntax-Brillian Corp

Indymac Bancorp Inc

Medis Technologies Ltd

Beazer Homes Usa Inc

InterOil Corp

Dendreon Corp

Ikb Deutsche Industriebank Ag

Chipotle Mexican Grill Inc

Globalstar Inc

La-z-boy Inc

Northern Rock Plc

Bradford & Bingley Plc

Corp by Fee > 10 < 100 Mln

Corp by Fee > 100 Mln

Rank Stock description

Fremont General Corp (7.875% 17-Mar-2009)

Dollar General Corp (10.625% 15-Jul-2015)

Tekni-Plex Inc (12.75% 15-Jun-2010)

Freescale Semiconductor Inc (10.125% 15-Dec-2016)

K Hovnanian Enterprises Inc (8.625% 15-Jan-2017)

Bon Ton Stores Inc (10.25% 15-Mar-2014)

Magnachip Semiconductor Finance Co (8% 15-Dec-2014)

Realogy Corp (12.375% 15-Apr-2015)

K Hovnanian Enterprises Inc (8.875% 01-Apr-2012)

Calpine Corp (8.5% 15-Feb-2011)

Burlington Coat Factory Warehouse Corp (11.125% 15-04-14)

Spectrum Brands Inc (11.25% 02-Oct-2013)

Claire'S Stores Inc (10.5% 01-Jun-2017)

Countrywide Financial Corp (0.758% 15-Apr-2037)

Beazer Homes Corp (8.125% 15-Jun-2016)

Countrywide Home Loans Inc (3.25% 21-May-2008)

Sally Holdings Llc (10.5% 15-Nov-2016)

Archer-Daniels-Midland Co (0.875% 15-Feb-2014)

James River Coal Co (9.375% 01-Jun-2012)

Countrywide Financial Corp (5.128% 05-May-2008)

Govt by Fee > 10 < 100 Mln

Govt by Fee > 100 Mln

Rank Stock description

Kfw Bankengruppe (4.75% 07-Dec-2012)

United States Treasury (3.625% 31-Dec-2012)

United States Treasury (0% 15-Aug-2021)

United States Treasury (4.375% 31-Jan-2008)

FNCL 452584 6.000 05/01/29

Federal Home Loan Banks (4.875% 17-May-2017)

Italy, Republic Of (Government) (0% 16-Jun-2008)

United States Treasury (4.25% 15-Nov-2017)

Federal National Mortgage Association (0% 19-Feb-2008)

United States Treasury (0% 01-May-2008)

FNCL 454118 6.000 12/01/28

United States Treasury (3.875% 31-Oct-2012)

United States Treasury (0% 15-Aug-2017)

United States Treasury (0% 06-Mar-2008)

United States Treasury (0% 15-Aug-2015)

United States Treasury (0% 20-Mar-2008)

United States Treasury (0% 15-Aug-2013)

United States Treasury (3.25% 31-Dec-2009)

United States Treasury (0% 15-Nov-2012)

United States Treasury (4.25% 30-Sep-2012)

SECURITIES LENDING DATA

A SNAPSHOT VIEW OF THE SECURITIES LENDING MARKET AS OF 30 JAN 2008

Source: Data Explorers, 2008. All figures kindly compiled by Data Explorers, February 2008.

FTSE GLOBAL MARKETS â&#x20AC;˘ MARCH/APRIL 2008

lF Wo FT TSE rld SE W Ind FT or D ex SE FT eve ld I S A FT dv E lop nde SE Em ed x a In e Se nce co d E rgin de x nd g m FT ary erg Ind ex in FT SE E g SE G me In FT D lob rgin de SE x FT eve al g In Ad SE lo All va Em ped Cap dex nc In ed erg All F Ca de FT TSE Em ing x p SE In Se erg All c Ca de Gl i x ob ond ng p A FT al G ary ll C Ind F ov Em ap ex FT TSE SE EP ern er SE In E EP PRA RA me gin dex RA /N /N nt g I A nd A / B F R FT TSE NAR REI EIT ond ex SE In EP EIT T G Gl d o EP lo R RA A/N Glo ba bal ex /N AR bal l RE Ind AR D ex E IT M M acq EIT IT G ivid s I ac n Gl lob end de qu uar x o + i al e ar In G ba R ie Gl lob l No ent de x a ob al n In -R l In al In fra ent de x fra st a st ruc l In ru de F tu x FT TSE ctu re In SE 4G re FT SE FT 4G oo 100 dex RA SE ood d G In FI GW G lob de x De A lob al In ve De al d 1 lo v pe elo 00 ex FT d In p de SE ex me RA US nt I x FI 10 nd Em 00 ex I er gi nde ng x In de x

Al % Change

Al lF Wo FT TSE rld SE W Ind FT or D ex SE FT eve ld FT Ad SE lop Ind SE va Em ed ex In e Se nce co d E rgin de x nd g m FT ary erg Ind FT SE Em ing ex SE G In e FT De lob rgin de al SE x F g v In Ad TSE elo All de C va E pe x nc me d A ap In ed rg ll F Ca de FT TSE Em ing x p SE In Se erg All c Ca de Gl i x ob ond ng p A FT al G ary ll C Ind F ov Em ap ex FT TSE SE e E SE In rn er E P EP PRA RA me gin dex RA /N /N nt g I AR nd A / B F FT TSE NAR REI EIT ond ex SE In EP EIT T G Gl d o EP lo R RA A/N Glo ba bal ex In /N A ba l R AR RE l D EIT de M x M acq EIT IT G ivid s I ac lo en nde G qu uar ba d+ x ar ie lob lR In a G ie Gl lob l No ent de x ob al n- al In In R al In fra ent de x fra st al st ruc In ru de F tu x FT TSE ctu re In SE 4G re FT SE FT 4G oo 100 dex RA SE ood d G In FI GW G lob de x De A lob al In ve De al d 1 lo v pe elo 00 ex FT d In p de SE ex me RA US nt I x FI 10 nd Em 00 ex I er gi nde ng x In de x

FT SE

96 % Change

Ja n08

Ju l-0 7

Ja n07

17:36

Ju l-0 7

Index Level Rebased (31 Jan 03=100)

12/2/08

Ja n06

Ju l-0 5

Ja n05

Ju l-0 4

Ja n04

Ju l-0 3

Ja n03

MARKET DATA BY FTSE RESEARCH

FT SE

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd Page 96

Global Market Indices

5-Year Total Return Performance Graph 800

700

FTSE All-World Index

600

FTSE Emerging Index

500

FTSE Global Government Bond Index

400

300

FTSE EPRA/NAREIT Global Index

200

FTSE4Good Global Index

100

Macquarie Global Infrastructure Index

FTSE GWA Developed Index

-6

-8

-10

FTSE RAFI Emerging Index

2-Month Performance

-2 0

-4

Capital return

Total return

-10

-12

-14

1-Year Performance

Capital return

Total return

-20

-30

MARCH/APRIL 2008 â&#x20AC;˘ FTSE GLOBAL MARKETS

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd

12/2/08

17:36

Page 97

Table of Capital Returns Index Name

Currency Constituents

FTSE All-World Indices FTSE All-World Index FTSE World Index FTSE Developed Index FTSE Emerging Index FTSE Advanced Emerging Index FTSE Secondary Emerging Index FTSE Global Equity Indices FTSE Global All Cap Index FTSE Developed All Cap Index FTSE Emerging All Cap Index FTSE Advanced Emerging All Cap Index FTSE Secondary Emerging Fixed Income FTSE Global Government Bond Index Real Estate FTSE EPRA/NAREIT Global Index FTSE EPRA/NAREIT Global REITs Index FTSE EPRA/NAREIT Global Dividend+ Index FTSE EPRA/NAREIT Global Rental Index FTSE EPRA/NAREIT Global Non-Rental Index Infrastructure Macquarie Global Infrastructure Index Macquarie Global Infrastructure 100 Index SRI FTSE4Good Global Index FTSE4Good Global 100 Index Investment Strategy FTSE GWA Developed Index FTSE RAFI Developed ex US 1000 Index FTSE RAFI Emerging Index

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

USD USD USD USD USD USD

2860 2441 1998 862 443 419

241.98 423.27 228.88 539.64 478.45 676.63

-9.4 -9.2 -9.1 -11.4 -10.4 -12.6

-5.6 -6.0 -6.0 -1.8 -4.9 2.7

0.3 -0.7 -1.8 21.9 18.3 26.8

-8.2 -7.9 -7.8 -11.9 -10.0 -14.2

2.45 2.48 2.47 2.27 2.64 1.78

USD USD USD USD USD

7892 6163 1729 919 810

404.99 385.56 762.84 680.85 933.08

-9.5 -9.1 -11.8 -11.4 -12.4

-6.3 -6.7 -3.0 -7.4 3.3

-0.2 -2.3 22.4 17.9 28.6

-8.3 -7.8 -12.4 -10.6 -14.5

2.37 2.39 2.21 2.60 1.71

USD

713

120.50

2.8

11.5

13.4

3.6

3.11

USD USD USD USD USD

295 188 228 239 56

2250.65 987.85 2070.40 1104.20 1424.43

-9.8 -8.2 -8.6 -8.2 -13.3

-7.9 -8.2 -5.0 -9.4 -4.0

-17.8 -22.3 -16.1 -23.5 0.1

-4.4 -3.2 -4.3 -2.9 -7.7

3.96 5.03 4.78 4.84 1.93

USD USD

242 10220.87 100 10055.56

-7.9 -7.8

4.7 5.4

10.4 10.2

-7.7 -7.3

3.01 3.04

USD USD

690 105

6320.57 5419.37

-9.8 -10.2

-7.6 -7.3

-4.8 -6.0

-8.1 -8.6

2.95 3.25

USD USD USD

1998 990 352

3872.38 6554.17 6317.07

-8.9 -10.9 -13.1

-7.5 -7.2 -1.4

-3.4 0.3 25.4

-7.2 -9.3 -12.8

2.87 3.14 2.72

Table of Total Returns Index Name

Currency Constituents

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

USD USD USD USD USD USD

2860 2441 1998 862 443 419

282.18 662.31 266.43 653.37 583.60 810.40

-9.2 -9.0 -8.9 -11.2 -10.1 -12.6

-4.8 -5.1 -5.2 -1.1 -3.9 3.2

2.6 1.6 0.4 24.6 21.3 29.1

-8.1 -7.8 -7.7 -11.7 -9.8 -14.2

2.45 2.48 2.47 2.27 2.64 1.78

USD USD USD USD USD

7892 6163 1729 919 810

450.81 428.55 870.03 783.18 1049.16

-9.3 -9.0 -11.6 -11.1 -12.4

-5.5 -5.8 -2.3 -6.5 3.7

2.0 -0.2 25.1 20.8 30.9

-8.2 -7.7 -12.2 -10.4 -14.5

2.37 2.39 2.21 2.60 1.71

USD

713

164.61

3.4

13.4

17.5

4.0

3.11

USD USD USD USD USD

295 188 228 239 56

3196.86 1072.01 2197.03 1196.38 1480.43

-9.2 -7.4 -7.9 -7.5 -13.0

-6.3 -6.2 -3.0 -7.6 -3.1

-15.0 -19.0 -12.6 -20.4 1.9

-4.3 -2.9 -4.1 -2.7 -7.7

3.96 5.03 4.78 4.84 1.93

USD USD

242 11703.94 100 11544.61

-7.6 -7.5

5.8 6.5

13.7 13.5

-7.6 -7.2

3.01 3.04

USD USD

690 105

7290.64 6293.16

-9.6 -10.0

-6.7 -6.2

-2.3 -3.3

-8.0 -8.5

2.95 3.25

USD USD USD

1998 990 352

4104.05 6941.58 6460.01

-8.7 -10.7 -12.8

-6.6 -6.4 -0.4

-1.0 3.0 28.5

-7.1 -9.2 -12.7

2.87 3.14 2.72

FTSE Research Team contact details Andy Harvell Head of Research andy.harvell@ftse.com +44 20 7866 8986

Andreas Elia Research Analyst andreas.elia@ftse.com +44 20 7866 8013

FTSE GLOBAL MARKETS â&#x20AC;˘ MARCH/APRIL 2008

Kamila Lewandowski Research Analyst kamila.lewandowski@ftse.com +44 20 7866 1877

Sandra Jim Research Manager, Asia Pacific sandra.jim@ftse.com +(852) 223 0-5814

% Change

F FT TSE SE Am N e FT orth rica S s I FT E L Am er nde at S FT x SE E A in A ica m In m N e FT orth rica eric dex a SE s A In La me All Ca dex ric t in FT Am a A p In SE ll d e LA rica Cap ex TI In A BE ll de C FT X x FT Al ap SE SE In l-S L h a de AT Am FT x re IB er SE In ica LA EX F TI TO dex s FT TS G B E P SE US ove EX I E Br nd rn A FT PRA FT Go me asi ex l S / n S v FT N E t B Ind E EP AR ern SE EP ex o EP RA RA EIT men nd /N RA /N t B Ind N A o A /N ex o rt RE R IT h A nd M ARE EIT ac No US me Ind qu IT r r ica ex N Di t ar v ie orth h A In m id No Am er end de x rth + er ica A ica Re Ind M ac me e n N x ta ri qu o ar ca I n-R l In ie nf de en US ra x st tal A In ruc Ind tu ex fra re s FT tru In FT SE ctu dex re SE 4G In 4G oo oo d U dex d S US In FT F FT TSE SE 10 dex RA SE GW 0 I nd R FI A A ex U S FI U US S I M id 10 nde Sm x 00 al l 1 Ind ex 50 0 In de x

98 % Change

-0 3

-0 4

-0 5

-0 6

Ja n

-0 8

Ju l-0 7

-0 7

17:36

Ja n

Index Level Rebased (31 Jan 03=100)

12/2/08

Ju l-0 7

Ja n

Ju l-0 5

Ja n

Ju l-0 4

Ja n

Ju l-0 3

Ja n

MARKET DATA BY FTSE RESEARCH

F FT TSE SE Am N e FT orth rica SE Am s I FT L er nde at S FT x SE E A in A ica m In m N e FT orth rica eric dex a SE s A In La me All Ca dex ric tin p a FT Am I A nd SE ll e LA rica Cap ex TI I Al B l C nde F T EX x FT Al ap SE SE In l-S ha de Am FT LAT x S r I e er B E In ica LA EX F TI TO dex s FT TS G SE E U ov BEX P I SA ern E Br nd ex a m FT PRA FT G en s i l SE /N ov FT SE I t Bo nde EP AR ern SE EP x EP RA RA EIT men nd /N RA /N t B Ind No /N AR AR e o r t x nd EI h M ARE EIT A T ac US me Ind N qu IT No orth Di rica ex ar vi rt ie A I No h A me den nde d+ x rth me ric a ric A Re Ind M a ac me e n No x ta ri qu ar ca I n-R l In ie n de en US fra x t al st A In ruc Ind tu ex fra re s FT tru In FT SE ctu dex 4 r SE Go e I 4G n o oo d U dex d S In FT F T US FT SE SE 10 dex 0 RA SE G RA WA Ind FI US F I US e x U M id S 1 Ind ex Sm 00 0 al l 1 Ind ex 50 0 In de x

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd Page 98

Americas Market Indices

5-Year Total Return Performance Graph 350

FTSE Americas Index

300

250

FTSE Americas Government Bond Index

200

FTSE EPRA/NAREIT North America Index

150

FTSE EPRA/NAREIT US Dividend+ Index

100

FTSE4Good USIndex

FTSE GWA US Index

FTSE RAFI US 1000 Index

2-Month Performance

-2 0

-4

-6

Capital return

-8

Total return

-10

-12

1-Year Performance

Capital return

-10

Total return

-20

-30

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd

12/2/08

17:36

Page 99

Table of Capital Returns Index Name

Currency Constituents

FTSE All-World Indices FTSE Americas Index FTSE North America Index FTSE Latin America Index FTSE Global Equity Indices FTSE Americas All Cap Index FTSE North America All Cap Index FTSE Latin America All Cap Index Region Specific FTSE LATIBEX All-Share Index FTSE LATIBEX TOP Index FTSE LATIBEX Brasil Index Fixed Income FTSE Americas Government Bond Index FTSE USA Government Bond Index Real Estate FTSE EPRA/NAREIT North America Index FTSE EPRA/NAREIT US Dividend+ Index FTSE EPRA/NAREIT North America Rental Index FTSE EPRA/NAREIT North America Non-Rental Index Infrastructure Macquarie North America Infrastructure Index Macquarie USA Infrastructure Index SRI FTSE4Good US Index FTSE4Good US 100 Index Investment Strategy FTSE GWA US Index FTSE RAFI US 1000 Index FTSE RAFI US Mid Small 1500 Index

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

USD USD USD

862 725 137

561.04 581.08 884.76

-6.6 -6.7 -4.8

-3.8 -4.4 8.7

-0.9 -2.4 36.6

-6.1 -6.1 -5.8

1.97 1.96 2.22

USD USD USD

2823 2622 201

355.92 343.14 1324.30

-6.6 -6.7 -5.2

-4.1 -4.7 7.5

-1.2 -2.5 35.7

-6.2 -6.2 -6.0

1.89 1.88 2.19

36 3288.80 15 4549.90 13 12327.80

-5.8 -9.6 -11.7

7.2 -5.5 3.6

38.6 17.2 39.0

-10.1 -9.9 -12.6

na na na

USD USD USD USD USD

154 134

116.26 113.77

2.1 2.2

7.2 6.9

8.1 7.4

2.1 2.4

3.58 3.54

USD USD USD USD

119 95 115 4

2274.01 1800.00 1042.06 1153.92

-7.1 -6.7 -7.4 -4.6

-6.7 -6.4 -6.7 -5.8

-25.7 -27.2 -26.5 -17.4

-1.7 -0.9 -1.6 -1.8

4.91 5.01 5.06 3.62

USD USD

97 90

8541.24 8442.33

-6.6 -7.2

3.1 2.6

6.7 5.4

-7.1 -7.3

2.86 2.83

USD USD

145 101

5027.71 4824.84

-8.2 -8.3

-6.8 -6.3

-7.9 -7.8

-6.9 -7.0

2.27 2.30

USD USD USD

668 962 1410

3480.54 5667.82 4906.34

-5.7 -6.3 -6.5

-5.8 -6.4 -8.8

-5.0 -5.9 -9.6

-4.6 -5.0 -6.6

2.22 2.26 1.45

Table of Total Returns Index Name

Currency Constituents

FTSE GLOBAL MARKETS • MARCH/APRIL 2008

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

USD USD USD

862 725 137

853.67 937.11 1106.74

-6.3 -6.4 -4.5

-2.8 -3.5 9.8

0.9 -0.6 39.7

-6.0 -6.0 -5.7

1.97 1.96 2.22

USD USD USD

2823 2622 201

388.73 374.21 1548.77

-6.3 -6.4 -4.8

-3.2 -3.8 8.6

0.6 -0.8 38.8

-6.0 -6.1 -5.9

1.89 1.88 2.19

EUR EUR EUR

36 15 13

na na na

USD USD

154 134

174.11 169.71

2.9 3.0

9.6 9.3

13.1 12.3

2.5 2.8

3.58 3.54

USD USD USD USD

119 95 115 4

3481.26 1913.64 1133.85 1239.77

-6.3 -5.8 -6.6 -4.1

-4.5 -4.2 -4.6 -3.9

-22.6 -24.1 -23.4 -14.8

-1.4 -0.6 -1.4 -1.3

4.91 5.01 5.06 3.62

USD USD

97 90

9748.30 9627.84

-6.3 -6.8

4.6 4.1

9.7 8.4

-6.9 -7.2

2.86 2.83

USD USD

145 101

5618.68 5410.96

-7.9 -8.0

-5.8 -5.2

-6.0 -5.8

-6.7 -6.8

2.27 2.30

USD USD USD

668 962 1410

3666.17 5955.54 5014.84

-5.4 -6.0 -6.6

-4.8 -5.4 -8.5

-3.1 -4.0 -8.7

-4.4 -4.8 -6.2

2.22 2.26 1.45

FT ve S l F E FT ope TS Eu SE d E E rop FT E De ur uro e I SE De FT vel ope blo nde SE op ex c I x ve F n e FT lope TS Eu d E UK de x E r SE d E op ur In De Eur uro e A ope de x ve op blo ll I lo e A c Ca nde pe l A p x d l C ll C In Eu ap a de ro e p I x x FT pe U nde SE All S I x Al Ca nde l-S p x FT FT ha Ind S S re ex FT Eu E 1 In SE rof 00 de x FT uro irst In SE fir 80 de x st u I F FT T ro 1 nd SE FT SE/ firs 00 ex SE JS t 3 In Eu 0 de / E ro zo F JSE Top 0 In x ne TS A 4 d Go E R ll-S 0 I ex FT ve us har nd FT SE rn sia e ex S EP FT FT E G FT me IO Ind RA SE SE ilt SE nt B ex /N EP E s F Pf Bo Ind AR R PR ixe an nd ex A A d d FT FTS EIT /NA /N Al bri Ind SE E E RE AR l-S ef ex ur E EP PR o IT EIT toc Ind RA A pe Eu E ks ex I / /N e r u M NA AR x U ope rop nde ac R E K e x qu EI IT D RE In T I i ar E v T d ie Eu uro ide s I ex r n n Eu op pe d d + e ro e pe No Ren In x n- ta de I F n FT F TS fr Re l I x SE TS E4 ast nt nd GW E4 Go ruc al I ex G o n A oo d E ture de x De d u ve Eu rop Ind FT lop rop e I ex SE ed e 5 nd RA Eu 0 I ex FI rop nd Eu e ex ro Ind pe e In x de x

% Change

FT ve S l F E FT ope TS Eu E ro S d FT E E p De Eur uro e I SE De FT vel ope blo nde SE op ex c I x ve F n e FT lope TS Eu d E UK de SE d E E rop ur In x o E u e p De ur ro A e de ve op blo ll I x lo e A c Ca nde pe l A p l l I x l d Eu Cap Ca nde ro e p I x x n p FT e U d SE All S I ex Al Ca nde l-S p x FT FT ha Ind SE SE re ex In FT u 1 SE rof 00 de x FT uro irst In SE fir 80 de FT uro st 1 In x FT d SE FT SE/ firs 00 ex SE JS t 3 In Eu /J E T 00 de ro S zo F E op In x ne TS A 4 d Go E R ll-S 0 I ex FT ve us har nd FT s SE r n ia e ex S EP FT FT E G FT me IO Ind RA SE SE ilt SE nt B ex s /N EP E F Pf Bo Ind AR RA PR ixe an nd ex A d d FT FTS EIT /NA /N Al bri Ind SE E E RE AR l-S ef ex u EP EPR ro IT EIT toc Ind RA A pe Eu E ks ex I / /N e r u M NA AR x U ope rop nde ac R E K e x qu EI IT D RE In ar T E Eu ivi ITs de x ie u ro de I Eu rop pe nd nd + e ro e pe No Ren In x I n t de FT F FTS nfr -Re al I x SE TS E4 ast nt nd E GW 4 Go ruc al I ex G o n A oo d E ture de x De d u ve Eu rop Ind ex r l e F T op op I SE ed e 5 nd RA Eu 0 I ex FI rop nd Eu e ex ro Ind pe e In x de x

FT SE

100 % Change

Ja n08

Ju l-0 7

Ja n07

17:36

Ju l-0 7

Index Level Rebased (31 Jan 03=100)

12/2/08

Ja n06

Ju l-0 5

Ja n05

Ju l-0 4

Ja n04

Ju l-0 3

Ja n03

MARKET DATA BY FTSE RESEARCH

FT SE

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd Page 100

European Market Indices

5-Year Total Return Performance Graph 400

350

FTSE Europe Index

300

FTSE All-Share Index

250

FTSEurofirst 80 Index

200

FTSE/JSE Top 40 Index

150

FTSE Gilts Fixed All-Stocks Index

100

FTSE EPRA/NAREIT Europe Index

FTSE4Good Europe Index

FTSE GWA Developed Europe Index

-20

FTSE RAFI Europe Index

2-Month Performance

-4

-8

Capital return

Total return

-12

-16

1-Year Performance

-10

Capital return

Total return

-30

-40

MARCH/APRIL 2008 â&#x20AC;˘ FTSE GLOBAL MARKETS

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd

12/2/08

17:36

Page 101

Table of Capital Returns Index Name

Currency Constituents

FTSE All-World Indices FTSE Europe Index FTSE Eurobloc Index FTSE Developed Europe ex UK Index FTSE Developed Europe Index FTSE Global Equity Indices FTSE Europe All Cap Index FTSE Eurobloc All Cap Index FTSE Developed Europe All Cap ex UK Index FTSE Developed Europe All Cap Index Region Specific FTSE All-Share Index FTSE 100 Index FTSEurofirst 80 Index FTSEurofirst 100 Index FTSEurofirst 300 Index FTSE/JSE Top 40 Index FTSE/JSE All-Share Index FTSE Russia IOB Index Fixed Income FTSE Eurozone Government Bond Index FTSE Pfandbrief Index FTSE Gilts Fixed All-Stocks Index Real Estate FTSE EPRA/NAREIT Europe Index FTSE EPRA/NAREIT Europe REITs Index FTSE EPRA/NAREIT Europe ex UK Dividend+ Index FTSE EPRA/NAREIT Europe Rental Index FTSE EPRA/NAREIT Europe Non-Rental Index Infrastructure Macquarie Europe Infrastructure Index SRI FTSE4Good Europe Index FTSE4Good Europe 50 Index Investment Strategy FTSE GWA Developed Europe Index FTSE RAFI Europe Index

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

EUR EUR EUR EUR

587 1998 385 520

218.67 120.24 221.74 214.04

-13.0 -13.4 -13.2 -12.9

-14.7 -13.2 -14.0 -14.8

-12.5 -10.0 -11.6 -12.9

-11.9 -13.0 -12.3 -11.6

3.32 2.89 3.34 3.39

EUR EUR EUR EUR

1750 845 1163 1629

362.53 389.60 389.98 357.39

-13.1 -13.6 -13.3 -13.0

-15.7 -14.4 -15.2 -15.9

-13.5 -11.1 -12.6 -13.9

-11.9 -12.9 -12.4 -11.6

3.23 3.37 3.26 3.29

GBP GBP EUR EUR EUR ZAR ZAR USD

674 3000.10 102 5879.78 78 4881.76 98 4258.44 313 1329.53 41 25117.79 234 27317.14 423 1172.52

-8.6 -8.6 -13.2 -13.0 -12.9 -9.1 -9.9 -15.0

-8.8 -7.6 -11.3 -13.2 -14.2 -2.8 -4.4 -3.8

-6.6 -5.2 -8.1 -10.9 -12.2 9.5 7.3 3.3

-8.7 -8.9 -13.2 -12.3 -11.8 -4.3 -5.7 -18.3

3.33 3.46 3.70 3.69 3.42 2.46 4.14 4.42

EUR EUR GBP

234 423 29

99.39 106.91 150.25

1.1 1.1 2.0

2.3 1.7 3.7

0.2 -0.3 1.8

1.9 1.8 0.3

4.18 4.42 4.44

EUR EUR EUR EUR EUR

97 37 47 83 14

1987.13 850.35 2301.82 957.21 977.51

-4.3 -1.4 -4.6 -3.6 -15.3

-18.7 -14.2 -11.3 -17.9 -30.3

-33.4 -29.8 -24.8 -33.1 -38.0

0.1 2.4 -0.5 0.8 -10.2

3.64 3.61 4.73 3.76 1.54

USD

56 13455.19

-9.6

7.6

18.4

-9.2

3.16

EUR EUR

290 55

4328.55 3749.25

-12.7 -13.3

-15.9 -15.5

-15.3 -15.8

-11.5 -11.9

3.70 4.03

EUR EUR

520 459

3456.15 5361.45

-13.3 -13.0

-10.8 -15.0

-9.1 -12.2

-5.4 -11.9

3.94 3.62

Table of Total Returns Index Name

Currency Constituents

FTSE All-World Indices FTSE Europe Index FTSE Eurobloc Index FTSE Developed Europe ex UK Index FTSE Developed Europe Index FTSE Global Equity Indices FTSE Europe All Cap Index FTSE Eurobloc All Cap Index FTSE Developed Europe ex UK All Cap Index FTSE Developed Europe All Cap Index Region Specific FTSE All-Share Index FTSE 100 Index FTSEurofirst 80 Index FTSEurofirst 100 Index FTSEurofirst 300 Index FTSE/JSE Top 40 Index FTSE/JSE All-Share Index FTSE Russia IOB Index Fixed Income FTSE Eurozone Government Bond Index FTSE Pfandbrief Index FTSE Gilts Fixed All-Stocks Index Real Estate FTSE EPRA/NAREIT Europe Index FTSE EPRA/NAREIT Europe REITs Index FTSE EPRA/NAREIT Europe ex UK Dividend+ Index FTSE EPRA/NAREIT Europe Rental Index FTSE EPRA/NAREIT Europe Non-Rental Index Infrastructure Macquarie Europe Infrastructure Index SRI FTSE4Good Europe Index FTSE4Good Europe 50 Index Investment Strategy FTSE GWA Developed Europe Index FTSE RAFI Europe Index

FTSE GLOBAL MARKETS • MARCH/APRIL 2008

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

EUR EUR EUR EUR

587 1998 385 520

269.19 153.06 268.75 263.91

-12.9 -13.3 -13.1 -12.8

-14.1 -12.7 -13.6 -14.2

-9.9 -7.3 -9.1 -10.2

-11.9 -12.9 -12.2 -11.6

3.32 2.89 3.34 3.39

EUR EUR EUR EUR

1750 845 1163 1629

419.74 450.78 447.26 414.23

-13.0 -13.4 -13.2 -12.9

-15.1 -13.9 -14.8 -15.2

-11.1 -8.6 -10.2 -11.4

-11.8 -12.8 -12.3 -11.6

3.23 3.37 3.26 3.29

GBP GBP EUR EUR EUR SAR SAR USD

674 102 78 98 313 41 234 423

3596.98 3416.67 5720.07 5034.61 1735.02 2685.87 2894.85 1191.74

-8.4 -8.5 -13.1 -12.9 -12.8 -9.0 -9.7 -14.7

-7.5 -6.2 -10.8 -12.3 -13.5 -1.7 -3.2 -2.9

-3.6 -1.9 -5.1 -7.8 -9.5 12.1 10.1 4.9

-8.7 -8.9 -13.1 -12.2 -11.7 -4.3 -5.6 -18.0

3.33 3.46 3.70 3.69 3.42 2.46 4.14 4.42

EUR EUR GBP

234 423 29

161.07 183.98 2059.64

1.9 1.8 2.1

4.5 3.9 6.3

4.6 3.9 7.1

2.3 2.1 0.4

4.18 4.42 4.44

EUR EUR EUR EUR EUR

97 37 47 83 14

2633.64 916.99 2505.14 1015.35 1001.09

-4.0 -0.9 -4.3 -3.2 -15.2

-17.7 -12.9 -10.4 -16.8 -30.2

-31.4 -27.3 -21.8 -31.0 -37.4

0.3 2.7 -0.2 1.0 -10.2

3.64 3.61 4.73 3.76 1.54

USD

56 15637.42

-9.4

8.4

22.1

-9.0

3.16

EUR EUR

290 55

5234.62 4575.79

-12.7 -13.3

-15.1 -14.6

-12.6 -12.8

-11.5 -11.8

3.70 4.03

EUR EUR

520 459

3712.14 5709.65

-13.2 -12.9

-16.3 -14.4

-12.7 -9.5

-11.8 -11.8

3.94 3.62

101

F As TS ia E Pa As cif ia F As TS ic Pa E ia e c A Pa s F x J ific i cif a TS ap In P ic a E an de ex cif Ja I x FT Ja ic A pan nde SE pa ll I x Ja n A Cap nde pa ll In x C n FT a d SE F FTS All p I ex Bu TS E/A Cap nde rs E/A SE I x n a FT M SE A d FT T al AN N I ex SE SE SE ays 4 nd As e ia FT Xi C T ia 0 In x Pa SE nh aiw 10 de cif /X ua a 0 I x n n i F ic G nh All 5 de FT SE FT TSE ov ua -Sh 0 In x EP SE EP ern Chi are de R E R m n I x FT FT A/ PR A/ en a 2 nd SE SE NA A/N NA t B 5 I ex R R o EP EP EI AR EI n nde R RA T E T d x FT A/N /N As IT A As Ind FT SE AR AR ia s ia ex SE I E EI Div ia 3 Ind ID DFC IT A T A ide 3 I ex FC I si sia nd nd In ndia a N Re + I ex o di n FT a In n-R nta de In fra e l I x SE fra st nt nd Bu a r F e s rs FTS TS tru uct l In x u E a M E S 4G ctu re dex al G o re In FT ays X S od 30 de SE ia ha Jap In x Sh Hijr ria an de ar ah h 1 In x ia 0 d FT h J Sha 0 I ex FT SE ap ria nd SE G an h I ex FT G WA 10 nd S W 0 e FT E R A Jap In x SE AF Au an de RA I A stra In x d FT FT FI iust lia I ex SE SE Sin ra nd lia e g R R a x FT AFI AF por Ind SE K I J e ex a RA aiga pa Ind FI i 1 n I ex Ch 00 nd in 0 I ex a n 50 de In x de x

FT SE

% Change

F As TS ia E Pa As cif ia F As TS ic Pa ia E e c Pa As F x J ific cif ia TS ap In ic Pa E an de e cif Ja I x FT x Ja ic A pan nde SE pa ll I x Ja n A Cap nde pa l l x I n Ca nd FT SE F FTS All p I ex n C T E Bu S /A ap de rs E/A SE I x n a FT M SE A d FT T al AN N I ex SE n a S S y As E E s 4 de ia FT Xi C T ia 0 In x Pa SE nh aiw 10 de cif /X ua a 0 I x n n i FT ic G nhu All- 50 de FT F SE T SE ov a Sh In x C e EP SE EP rn hi are de R E R m n I x FT FT A/ PR A/ en a 2 nd SE SE NA A/N NA t B 5 I ex EP EP REI AR REI on nde R RA T E T d x F A/ /N As IT As Ind FT TSE NAR AR ia Asi ia ex SE I E EI Div a 3 Ind ID DFC IT A T A ide 3 I ex FC I si sia nd nd In ndia a N Re + I ex o di n FT a In n-R nta de In fra e l I x SE fra st nt nd Bu a r F e s u l rs FTS TS tru ct In x u E a M E S 4G ctu re dex al G oo re In FT ays X S d 30 de SE ia ha Jap In x Sh Hijr ria an de ar ah h 1 In x ia 0 d F h Sha 0 ex FT TSE Jap ria Ind SE G an h I ex FT G WA 10 nd S W 0 e FT E R A Jap In x SE AF Au an de RA I A stra In x d FT FT FI iust lia I ex SE SE Sin ral nd RA R ga ia I ex FT FI AF por nd SE K I J e ex a RA aiga pa Ind FI i 1 n I e x Ch 00 nd in 0 I ex a n 50 de In x de x FT SE

FT SE

102 % Change

-0 3

-0 4

-0 5

-0 7

Ja n

-0 8

Ju l-0 7

Ja n

17:36

Ju l-0 7

-0 6

Index Level Rebased (31 Jan 03=100)

12/2/08

Ja n

Ju l-0 5

Ja n

Ju l-0 4

Ja n

Ju l-0 3

Ja n

MARKET DATA BY FTSE RESEARCH

FT SE

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd Page 102

Asia Pacific Market Indices

5-Year Total Return Performance Graph 2400

2100

FTSE Asia Pacific Index

1800

FTSE/ASEAN 40 Index

1500

1200

FTSE/Xinhua China 25 Index

900

FTSE Asia Pacific Government Bond Index

600

FTSE IDFC India Infrastructure Index

300

2-Month Performance

-5

-10

Capital return

-15

Total return

-20

-25

1-Year Performance

100

Capital return

Total return

-20

-40

MARCH/APRIL 2008 â&#x20AC;˘ FTSE GLOBAL MARKETS

MARKET REPORTS 24.qxd:MARKET REPORTS 24.qxd

12/2/08

17:36

Page 103

Table of Capital Returns Index Name

Currency Constituents

FTSE All-World Indices FTSE Asia Pacific Index FTSE Asia Pacific ex Japan Index FTSE Japan Index FTSE Global Equity Indices FTSE Asia Pacific All Cap Index FTSE Asia Pacific ex Japan All Cap Index FTSE Japan All Cap Index Region Specific FTSE/ASEAN Index FTSE/ASEAN 40 Index FTSE Bursa Malaysia 100 Index TSEC Taiwan 50 Index FTSE Xinhua All-Share Index FTSE/Xinhua China 25 Index Fixed Income FTSE Asia Pacific Government Bond Index Real Estate FTSE EPRA/NAREIT Asia Index FTSE EPRA/NAREIT Asia 33 Index FTSE EPRA/NAREIT Asia Dividend+ Index FTSE EPRA/NAREIT Asia Rental Index FTSE EPRA/NAREIT Asia Non-Rental Index Infrastructure FTSE IDFC India Infrastructure Index FTSE IDFC India Infrastructure 30 Index SRI FTSE4Good Japan Index Shariah FTSE SGX Shariah 100 Index FTSE Bursa Malaysia Hijrah Shariah Index FTSE Shariah Japan 100 Index Investment Strategy FTSE GWA Japan Index FTSE GWA Australia Index FTSE RAFI Australia Index FTSE RAFI Singapore Index FTSE RAFI Japan Index FTSE RAFI Kaigai 1000 Index FTSE RAFI China 50 Index

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%)

USD USD USD

1271 800 471

271.25 467.56 92.57

-11.0 -13.1 -12.0

-6.8 -3.1 -20.6

4.4 19.8 -21.3

-9.0 -12.4 -8.8

2.20 2.74 1.50

USD USD USD

3125 1804 1321

476.40 623.77 326.30

-11.5 -13.6 -12.2

-7.7 -4.5 -21.1

4.4 20.0 -21.8

-9.5 -13.0 -8.9

2.19 2.68 1.52

USD USD MYR TWD CNY HKD

150 459.10 40 9167.09 100 9205.98 50 5507.44 1019 10602.06 25 20416.73

-4.5 -3.2 1.1 -11.4 1.5 -24.2

1.4 1.5 2.1 -14.5 3.3 -2.3

22.5 20.0 18.1 -2.1 96.5 31.0

-6.9 -6.1 -3.1 -10.6 -11.2 -20.0

3.09 3.24 2.83 4.08 0.50 1.62

USD

253

96.56

5.0

16.5

17.1

5.6

1.42

USD USD USD USD USD

79 39 52 41 38

2083.71 1575.72 2587.25 1159.22 1481.99

-14.8 -13.7 -13.7 -15.4 -14.4

-7.0 -4.7 -2.1 -13.3 -2.5

-3.0 -5.1 4.3 -14.6 6.1

-9.4 -7.5 -11.1 -10.7 -8.5

3.20 6.1 4.51 5.63 1.67

IRP IRP

63 30

1478.65 1600.03

-10.8 -11.7

24.0 30.1

70.0 82.6

-18.4 -18.8

0.45 0.53

JPY

190

5047.99

-11.4

-19.1

-20.6

-8.6

1.48

USD MYR JPY

100 5742.68 30 11332.27 100 1415.48

-10.1 3.3 -12.2

-7.3 18.4 -20.9

1.2 45.8 -20.0

-7.7 -2.8 -10.3

1.95 2.39 1.55

JPY AUD AUD SGD JPY JPY HKD

471 111 55 19 342 995 50

-11.3 -13.9 -12.0 -12.6 -11.0 -13.0 -21.2

-19.7 -9.3 -7.0 -16.6 -19.1 -16.3 2.9

-20.8 -3.7 -2.7 -2.8 -19.7 -13.4 na

-8.2 -10.4 -9.7 -12.7 -8.7 -12.4 -17.5

1.56 4.50 4.51 3.87 1.60 2.98 2.23

3606.29 3990.02 6016.74 6825.25 5036.39 5234.14 6756.65

Table of Total Returns Index Name

Currency Constituents

FTSE GLOBAL MARKETS • MARCH/APRIL 2008

USD USD USD

1271 800 471

Value 2 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Yld (%) 310.87 -10.9 -5.9 6.4 -8.9 1.86 582.42 -12.9 -2.0 23.0 -12.3 2.45 110.68 -12.0 -20.1 -20.4 -8.8 1.17

USD USD USD

3125 1804 1321

526.28 726.60 345.18

-11.3 -13.4 -12.2

-6.9 -3.5 -20.6

6.5 23.1 -20.8

-9.4 -12.9 -8.9

1.84 2.37 1.17

USD USD MYR TWD CNY CNY

150 563.23 40 10064.97 100 9711.65 50 6573.71 1019 11443.82 25 24881.90

-4.3 -2.9 1.4 -11.4 1.5 -24.2

2.9 3.1 3.7 -13.7 3.3 -1.7

26.4 23.8 21.7 1.2 97.7 33.4

-6.8 -6.1 -3.1 -10.6 -11.2 -20.0

2.71 2.81 2.50 3.38 0.55 1.49

USD

253

113.20

5.2

17.4

19.6

5.7

1.42

USD USD USD USD USD

79 39 52 41 38

2745.20 1731.78 2750.31 1277.24 1530.60

-14.4 -13.2 -13.1 -14.7 -14.2

-5.7 -3.1 -0.2 -11.4 -1.7

-0.3 -2.1 8.4 -10.7 7.7

-9.4 -7.5 -11.0 -10.6 -8.5

2.85 5.0 3.86 4.66 1.53

IRP IRP

63 30

1483.14 1605.64

-10.8 -11.6

24.3 30.4

71.0 83.9

-18.4 -18.8

0.51 0.66

JPY

190

5392.56

-11.4

-18.6

-19.6

-8.6

1.24

USD MYR JPY

100 5959.20 30 12058.42 100 1486.52

-9.9 3.5 -12.1

-6.5 19.8 -20.4

3.0 50.0 -19.0

-7.6 -2.7 -10.3

1.73 2.59 1.24

JPY AUD AUD SGD JPY JPY HKD

471 111 55 19 342 995 50

-11.3 -13.6 -11.8 -12.2 -10.9 -12.8 -21.1

-19.2 -7.4 -4.9 -14.8 -18.6 -15.5 3.8

-19.8 0.2 1.6 0.5 -18.7 -11.1 na

-8.2 -10.4 -9.7 -12.7 -8.7 -12.3 -17.5

1.23 3.77 4.14 2.96 1.26 2.65 2.05

3714.37 4422.28 6644.23 7309.91 5173.20 5498.25 6919.68

103

GM EDITORIAL 24.qxd:Issue 24

19/2/08

18:08

Page 104

CALENDAR

Index Reviews March – Early June 2008 Date

Index Series

Review Type

Effective Data Cut-off (Close of business)

Early Mar

ATX

Semi-annual review / number of shares

31-Mar

29-Feb

Early Mar

CAC 40

Quarterly review

21-Mar

29-Feb

Early Mar

S&P / TSX

Quarterly review

21-Mar

29-Feb

3-Mar

S&P / MIB

Semi-annual review

19 Mar

10 Mar

3-Mar

S&P / ASX Indices

Annual / Quarterly review

21-Mar

29-Feb

3-Mar

DAX

Quarterly review

21-Mar

29-Feb

4-Mar

FTSE All-World

Annual review Asia Pacific ex Japan

25-Mar

31-Dec

11-Mar

NZSX 50

Quarterly review

31-Mar

29-Feb

11-Mar

S&P MIB

Quarterly review - shares & IWF

15-Mar

10-Mar

12-Mar

FTSE Asiatop / Asian Sectors

Semi-annual review

25-Mar

29-Feb

12-Mar

FTSE/ASEAN 40 Index

Annual review

25-Mar

29-Feb

12-Mar

FTSE UK

Quarterly review

25-Mar

11-Mar

12-Mar

FTSEurofirst 300

Quarterly review

25-Mar

29-Feb

12-Mar

FTSE techMARK 100

Quarterly review

25-Mar

29-Feb

12-Mar

FTSE eTX

Quarterly review

25-Mar

29-Feb

12-Mar

FTSE/JSE Africa Index Series

Quarterly review

25-Mar

7-Mar

12-Mar

FTSE EPRA/NAREIT Global Real Estate Index Series

Quarterly review

25-Mar

7-Mar

13-Mar

FTSE4Good Index Series

Semi-annual review

25-Mar

29-Feb

14-Mar

NASDAQ 100

Quarterly review / Shares adjustment

21-Mar

29-Feb

14-Mar

S&P US Indices

Quarterly review

21-Mar

7-Mar

14-Mar

S&P Europe 350 / S&P Euro

Quarterly review

21-Mar

7-Mar

14-Mar

S&P Topix 150

Quarterly review

21-Mar

7-Mar

14-Mar

S&P Asia 50

Quarterly review

21-Mar

7-Mar

14-Mar

S&P Global 1200

Quarterly review

21-Mar

7-Mar

14-Mar

S&P Global 100

Quarterly review

21-Mar

7-Mar

14-Mar

S&P Latin 40

Quarterly review

21-Mar

7-Mar

19-Mar

DJ STOXX

Quarterly review (components)

21-Mar

20-Feb

19-Mar

DJ STOXX

Quarterly review (style)

21-Mar

1-Mar

19-Mar

Russell US Indices

Quarterly review - IPO additions only

31-Mar

29-Feb

9-Apr

FTSE/Xinhua Index Series

Quarterly review

18-Apr

24-Mar

9-Apr

FTSE Nordic 30

Semi-annual review

18-Apr

31-Mar

10-Apr

TSEC Taiwan 50

Quarterly review

18-Apr

31-Mar

Mid April

OMX H25

Quarterly review - shares in issue

30-Apr

31-Mar

Late April

FTSE / ATHEX

Semi-annual review

30-May

30-Mar

9-May

Hang Seng

Quarterly review

2-Jun

31-Mar

Mid-May

FTSE Med 100 Index

Semi-annual review

18-May

27-Apr

16-May

MSCI Standard Index Series

Annual review

30-May

30-Apr

Early Jun

ATX

Quarterly review

30-Jun

31-May

Early Jun

KOSPI 200

Annual review

9-Jun

31-May

Early Jun

IBEX 35

Semi-annual review

1-Jul

31-May

Early Jun

CAC 40

Quarterly review

20-Jun

31-May

Early Jun

OBX

Semi-annual review

20-Jun

31-May

Early Jun

S&P / TSX

Quarterly review

20-Jun

30-May

Sources: Berlinguer, FTSE, JP Morgan, Standard & Poors, STOXX

104

MARCH/APRIL 2008 • FTSE GLOBAL MARKETS

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