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Financial Markets – Global Securities Finance Equity Lending and Repo Equity lending involves the loan of an equity position to a borrower vs. collateral at an agreed upon haircut and interest rate for the duration of the loan. Equity repo involves a sale and forward purchase of equity vs. cash. The primary motivation behind equity lending is a desire by the borrower to acquire a specific security in order to cover a market short position. The rate paid by the borrower for the stock is dependent upon the demand for the particular security. The owner/lender of the shares retains economic ownership of the shares, and is entitled to receive substitute payments on all dividends and coupons that transpire during the course of the loan and also retains the right to all corporate actions. However, the lender loses voting rights for the duration of the loan. The lender also retains the right to recall the stock loan at any time - in the event of a recall; the borrower is required to return the shares to the lender on the standard settlement for the country in which the equity trades unless otherwise agreed. Advantages of Equity Lending Equity Lending and Repo with ING • Portfolio Managers can significantly increase portfolio returns, particularly when lending ‘specials’ which are specific issues with higher lending value • Global Platform – an extensive global supply from ING assets, exclusive portfolios, and institutional relationships • • Standard internationally accepted agreements: the Global Master Securities Lending Agreement (GMSLA), the Master Securities Lending Agreement (MSLA), and the Global Master Repurchase Agreement (GMRA), give protection to both lender and borrower and define margining, collateral and default provisions Competitive Pricing – ING Bank NV has an A rating and can offer highly competitive rates across the majority of developed and emerging markets • Market Access – through its global footprint and local market knowledge, ING can offer access to both industrialized and emerging equity markets Potentially reduced custodial costs • Access to trading via Central Counterparties (CCP’s) – this significantly reduces counterparty risk exposure and consumption of capital • Integrated Securities Finance Platform – ING offers complementary products such as Linear Equity Derivatives, Fixed Income Repo, Tri-Party Repo and Synthetic Prime Brokerage • Lending Equity Securities The main components of an Equity Loan are as follows • • • Collateral – stock can be lent versus cash or non-cash collateral. Non-cash collateral can take the form of equities or bonds but can be anything agreed between the counterparties at the time of trade Rebate/Fee – lenders will pay an agreed rebate rate on the cash collateral received in a stock lending transaction. The agreed upon rebate rate for ‘open’ transactions will normally be set at an agreed spread to a benchmark rate and is adjusted as needed to account for movements in that benchmark. In a non-cash collateral transaction the borrower of securities will pay a fee for the loan of the security. The lending fee is a set at a mutually agreed 'market' rate the borrower incurs for the use of the securities Dividends – if a stock loan transaction carries over the dividend record date for a security, the lender is entitled to receive an ‘in lieu’ dividend payment from the borrower that will fully compensate the lender for not receiving the actual dividend • Corporate Actions – the lender of the security is entitled to the full benefit of all economic events, but loses the voting rights, if the stock is on loan over a record date • Mark to Market – both lender and borrower of a security retain the right to re-price loaned securities, on a daily basis, such that the collateral value received accurately reflects the market price + haircut for the security on loan Principal Stock Loan Transaction – cash collateral Rebate Borrower Stock loan Cash collateral Stock borrow Lender Cash collateral Principal Stock Loan Transaction – non-cash collateral Fee Borrower Stock loan Non-cash collateral 1 Rebate Fee Stock borrow Lender Non-cash collateral Financial Markets – Global Securities Finance Equity Lending and Repo ING as Cash provider Cash Customer Account Tri-party agency Cash Tri-party Repo is a form of delivery Repo that involves ING (as collateral buyer or seller), the client (collateral buyer or seller) and a custodian bank or clearing house (tri-party custodian). ING Bank has arrangements with all of the tri-party custodians available in the market. This allows the client to choose their preferred tri-party custodian when entering an arrangement with ING. These Tri-party Repos are governed by an MRA/GMRA with an equity annex and triparty custodial agreement. The agreement outlines the responsibilities of each party and the procedures for the day-to-day transactions. Overview of Tri-party Cash and Collateral movements Collateral Tri-party equity repo Customer as Collateral Collateral provider ING Account Advantages of tri-party Repo • Flexibility – clients can choose the specific types of collateral they would like to finance. ING will work with the client to determine attractive haircut requirements, financing rates, and investment terms (be it overnight, open, or term) • Security – the tri-party custodian handles all aspects of collateral management including daily mark to market and margin calls. The custodian ensures the segregation of collateral into the correct account • Efficiency – the operational flows become standardized with regard to settlement instructions and cash movements • Cost effectiveness – the tri-party arrangements result in the reduction of delivery, transaction, and operational costs to the client • Reliable Funding – ING can provide its clients with enhanced liquidity in the form of structured committed facilities • Connectivity – tri-party custodians are capable of receiving securities from, and delivering to, a wide variety of front end trading platforms Markets1 Americas Canada Mexico United States Developed Europe Austria Belgium Denmark Finland France Germany Ireland Italy Netherlands Norway Portugal Spain Sweden Switzerland U.K Eastern Europe Asia/Pacific Africa Czech Republic Hungary Poland Russia Turkey Australia Hong Kong Japan New Zealand Singapore South Korea Thailand South Africa 1. This list is correct at the time of publishing but new markets are constantly being added and ING will always try to accommodate client requests to trade new markets Disclaimer: This publication has been prepared by ING (being for this purpose the commercial and investment banking business of ING Bank NV and certain of its subsidiary companies) solely for the information of its clients. ING forms part of ING Group (being for this purpose ING Groep NV and its subsidiary and affiliated companies). It is not investment advice or an offer or solicitation for the purchase or sale of any financial instrument or product. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, ING makes no representation that it is accurate or complete. The information contained herein is subject to change without notice. Neither ING nor any of its officers or employees accepts any liability for any direct or consequential loss arising from any use of this publication or its contents. Copyright protection exists in this publication and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and subject to significant price volatility and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Past performance is not indicative of future results. Investors should make their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in the product(s) described in this publication. This publication is issued:1) in the United Kingdom only to persons described in Articles 19, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and is not intended to be distributed, directly or indirectly, to any other class of persons (including private investors); 2) in Italy only to persons described in Article No. 31 of Consob Regulation No. 11522/98. Clients should execute transactions through an ING entity in their home jurisdiction unless governing law permits otherwise. ING Bank N.V., London branch is authorized by the Dutch Central Bank and regulated by the Financial Services Authority for the conduct of UK business. It is incorporated in the Netherlands and its London branch is registered in the UK (number BR000341) at 60 London Wall, London EC2M 5TQ. ING Capital Markets LLC distributes this brochure in the United States. 2