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Europe steps up lending activity

Guide to Securities Lending in Europe's markets

From a core band of active European markets such as Germany, France and the UK, the demand for securities lending business has spread considerably throughout the rest of Europe in the last few years.

Scandinavia, in particular, has been keen to embrace the development of the market, with Sweden taking the lead via strong domestic demand and accompanying guidance rules for transactions.

The southern European markets are also growing quickly as guidelines for lending and borrowing evolve in Italy and Spain.

Such growth though has thrown up many questions on the need for such codes of practice or even government legislation to ensure securities lending is sufficiently protected and monitored.

Suggestions are that the single currency could provide a practical umbrella under which accords could be reached. Although, on the other hand, it is believed that individual governments will almost certainly wish to remain very 'hands-on' with any issues affecting their domestic financial markets.

One thing is certain, the evolution of parts of the European securities lending market still has some way to goand will be a major topic of discussion throughout the post-Emu march into the new millenium.

AUSTRIA

* Development of marketplace:

Moderate

* Demand for local securities in local market? (estimated proportion of the total):

Yes (30%)

* Demand for local securities from other markets? (estimated proportion of the total):

Yes (70%)

* Main forces in marketplace from supply and demand sides:

Failed settlements, market strategic

* Securities lending legislation in local market?:

Yes, funds can only use 30% of their holdings for securities lending

* Tax factors affecting securities lending activities?:

No

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

No

Information supplied by Deutsche Bank, Austria Ð

BELGIUM

* Development of marketplace:

Undeveloped

* Demand for local securities in local market? (estimated proportion of the total):

No

* Demand for local securities from other markets? (estimated proportion):

Yes (100% - 90%UK/US based)

* Main forces in marketplace from supply and demand sides:

Main drive is need to cover fails and avoid counter-party claims and/or buy-ins. But also mandatory for implementation of rolling settlement cycle in equities

* Securities lending legislation in local market?:

No

* Tax factors affecting securities lending activities?:

Yes. This is main reason for non-existence of Belgian lending programmes. No framework to cover fiscal aspect of securities on loan or for dividend payment. Entitlement is related to actual stock holding

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

Yes

Information provided by Paribas Securities Services

DENMARK

* Development of marketplace:

Poor

* Demand for local securities in local market? (estimated proportion of the total):

Yes (no statistics available)

* Demand for local securities from other markets? (estimated proportion):

Yes (no statistics available)

* Main forces in marketplace from supply and demand sides:

No special facilities for securities lending inDanish Securities Centre. Repo trades generally used to offset negative effects of belated settlements, but no automatic system. Buy and sell arangements on Danish equities made on a case by case basis, along lines of traditional settlement

* Securities lending legislation in local market?:

No

* Tax factors affecting securities lending activities?:

Yes, but unsolved issue is whether securities lending be treated as sale and repurchase transaction, or straightforward loan

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

No

Information provided by Den Danske Bank

FINLAND

Securities lending is not yet practised in the Finnish market, since the required legislation only came into force in June 1998. Local market participants are likely to develop products in the near future, but only the Helsinki Stock Exchange (HEX) so far provides a service comparable to securities lending called LEX-lending

Information provided by Merita Nordbanken Group

FRANCE

* Development of marketplace:

Very developed

* Demand for local securities in local market? (estimated proportion of the total):

Yes (50%)

* Demand for local securities from other markets? (estimated proportion):

Yes (50%)

* Main forces in marketplace from supply and demand sides:

Local market failed trade coverage is developing to encompass more arbitrage opportunities, particularly index and warrant arbitrage

* Securities lending legislation in local market?:

No

* Tax factors affecting securities lending activities?:

Yes, dividend requirements and relevant country WHT rates and rules will affect taxes

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

Yes

Information provided by Deutsche Bank, France

GERMANY

* Development of marketplace:

Very developed

* Demand for local securities in local market? (estimated proportion of the total):

Yes (40%)

* Demand for local securities from other markets? (estimated proportion):

Yes (60%)

* Main forces in marketplace from supply and demand sides:

Some failed trade coverage, but mainly basket trading and index arbitrage. A little short selling coverage also

* Securities lending legislation in local market?:

No, but some specific client groups have their own regulations

* Tax factors affecting securities lending activities?:

Yes dividend requirements and relevant WHT rates could affect borrowers

* Market agreed codes of practice?:

No, but as with legislation there are some local client rules

* Are there expected moves to market practices in the future?:

Yes

Information supplied by Deutsche Bank, Germany

IRELAND

There is no structured form of securities lending of Irish equities in the Irish market

Information supplied by Bank of Ireland Securities Services

ITALY

* Development of marketplace:

Moderately developed

* Demand for local securities in local market? (estimated proportion of the total):

Yes (20%)

* Demand for local securities from other markets? (estimated proportion):

Yes (80%)

* Main forces in marketplace from supply and demand sides:

Technical and strategic shorts and arbitrages

* Securities lending legislation in local market?:

Yes, fiscal treatment

* Tax factors affecting securities lending activities?::

Yes, dividend arbitrage opportunities

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

Yes

Information provided by Deutsche Bank, Italy

NETHERLANDS

* Development of marketplace:

Very developed

* Demand for local securities in local market? (estimated proportion):

Yes (40%)

* Demand for local securities from other markets? (estimated proportion):

Yes (60%)

* Main forces in marketplace from supply and demand sides:

Demand - covering shortselling strategies, failed settlements, tax driven strategies. Supply - pension funds/insurance companies

* Securities lending legislation in local market?:

No

* Tax factors affecting securities lending activities?:

Yes, witholding tax

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

No

Information provided by Deutsche Bank, The Netherlands

NORWAY

* Development of marketplace:

Poorly Developed

* Demand for local securities in local market? (estimated proportion):

No

* Demand for local securities from other markets? (estimated proportion):

Yes (90%)

* Main forces in marketplace from supply and demand sides:

Short sales, trading purposes and partly failing settlements

* Securities lending legislation in local market?:

Yes, The Securities Trading Act

* Tax factors affecting securities lending activities?:

Yes, for domestic lenders securities lending is currently regarded as realisation, causing taxation. Concern for dividend= withholding tax

* Market agreed codes of practice?:

No

* Are there expected moves to market practices in the future?:

Yes

Information provided by Deutsche Bank, Norway

SPAIN

* Development of marketplace:

Poor to moderate

* Demand for local securities in local market? (estimated proportion):

No

* Demand for local securities from other markets? (estimated proportion):

Yes (80%)

* Main forces in marketplace from supply and demand sides:

Mostly driven by failed settlements/shortage of securities. There is also a subscription right based lending, ie sale of securities covered by purchase of subscription rights, and also in connection with option positions

* Securities lending legislation in local market?:

Yes, according to stock market commission rules of the SCLV (Systema compenseon liquidacion de Valores), lending must come no later than two days after the trade settlement

* Tax factors affecting securities lending activities?:

Yes, mainly withholding tax issues

* Market agreed codes of practice?:

Yes, in cases of distribution dividend payment

* Are there expected moves to market practices in the future?:

N/A

Information provided by Deutsche Bank, Spain

SWEDEN

* Development of marketplace:

Moderate

* Demand for local securities in local market? (estimated proportion):

Yes (75%)

* Demand for local securities from other markets? (estimated proportion):

Yes (25%)

* Main forces in marketplace from supply and demand sides:

Approximately 25% of market driving force is to avoid failed settlements 75% is other various opportunities in the market

* Securities lending legislation in local market?:

Yes, regulation of short selling

* Tax factors affecting securities lending activities?:

Yes, affecting dividend arbitrage opportunities

* Market agreed codes of practice?:

Yes, covering collateral margins and stock lending agreements

* Are there expected moves to market practices in the future?:

No

Information provided by Deutsche Bank, Sweden

SWITZERLAND

* Development of marketplace:

Very developed

* Demand for local securities in local market? (estimated proportion):

Yes (75%)

* Demand for local securities from other markets? (estimated proportion):

Yes (25%)

* Main forces in marketplace from supply and demand sides:

Supply is principally driven by institutional investors looking for increased income. Demand is mostly based on growth of Swiss equity derivatives and development of Swiss repo market

* Securities lending legislation in local market?:

Yes, for commercial banks, securities lending is covered by Swiss banking regulations. Institutional investors also have a clear framework from which they can operate

* Tax factors affecting securities lending activities?:

Yes, manufactured dividends and subsequent withholding taxes are regulated. To avoid double reclamation of withholding taxes, local brokers running short positions in Swiss equities have to submit the 35% withholding tax to the local tax authorities. Foreign based institutions borrowing Swiss equities will pay the full dividend of 100%, with the Swiss lender again paying 35% to the tax authorities

* Market agreed codes of practice?:

Yes, generally accepted legal framework - the Swiss 2-way agreement, which meets international industry standards and is used by major market participants. Transactions in Swiss securities with foreign based counterparts is normally conducted under industry standard overseas securities lending agreement

* Are there expected moves to market practices in the future?:

N/A

Information provided by Credit Suisse First Boston, Switzerland

UK

* Development of marketplace:

Very developed

* Demand for local securities in local market? (estimated proportion):

Yes (95%)

* Demand for local securities from other markets? (estimated proportion):

Yes (5%)

* Main forces in marketplace from supply and demand sides:

Failed settlements account for small percentage of business. Prime reasons are covering of shorts and derivatives, with index arbitrage playing a large part

* Securities lending legislation in local market?:

Yes, for tax and manufactured dividends through HM insurance company regulations

* Tax factors affecting securities lending activities?:

Yes, for manufactured dividends

* Market agreed codes of practice?:

Yes, the SLRC code of guidance covers securities lending, and the Good Practice guides cover repo markets

* Are there expected moves to market practices in the future?:

N/A

Information provided by Deutsche Bank, UK

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