Frontmatter Page iii Monday, July 18, 2005 12:27 PM Securities Finance Securities Lending and Repurchase Agreements FRANK J. FABOZZI STEVEN V. MANN EDITORS John Wiley & Sons, Inc. Frontmatter Page viii Monday, July 18, 2005 12:27 PM Frontmatter Page i Monday, July 18, 2005 12:27 PM Securities Finance Frontmatter Page ii Monday, July 18, 2005 12:27 PM THE FRANK J. FABOZZI SERIES Fixed Income Securities, Second Edition by Frank J. Fabozzi Focus on Value: A Corporate and Investor Guide to Wealth Creation by James L. Grant and James A. Abate Handbook of Global Fixed Income Calculations by Dragomir Krgin Managing a Corporate Bond Portfolio by Leland E. Crabbe and Frank J. Fabozzi Real Options and Option-Embedded Securities by William T. Moore Capital Budgeting: Theory and Practice by Pamela P. Peterson and Frank J. Fabozzi The Exchange-Traded Funds Manual by Gary L. Gastineau Professional Perspectives on Fixed Income Portfolio Management, Volume 3 edited by Frank J. Fabozzi Investing in Emerging Fixed Income Markets edited by Frank J. Fabozzi and Efstathia Pilarinu Handbook of Alternative Assets by Mark J. P. Anson The Exchange-Traded Funds Manual by Gary L. Gastineau The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry The Handbook of Financial Instruments edited by Frank J. Fabozzi Collateralized Debt Obligations: Structures and Analysis by Laurie S. Goodman and Frank J. Fabozzi Interest Rate, Term Structure, and Valuation Modeling edited by Frank J. Fabozzi Investment Performance Measurement by Bruce J. Feibel The Handbook of Equity Style Management edited by T. Daniel Coggin and Frank J. Fabozzi The Theory and Practice of Investment Management edited by Frank J. Fabozzi and Harry M. Markowitz Foundations of Economic Value Added: Second Edition by James L. Grant Financial Management and Analysis: Second Edition by Frank J. Fabozzi and Pamela P. Peterson Measuring and Controlling Interest Rate and Credit Risk: Second Edition by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry Professional Perspectives on Fixed Income Portfolio Management, Volume 4 edited by Frank J. Fabozzi The Handbook of European Fixed Income Securities edited by Frank J. Fabozzi and Moorad Choudhry The Handbook of European Structured Financial Products edited by Frank J. Fabozzi and Moorad Choudhry The Mathematics of Financial Modeling and Investment Management by Sergio M. Focardi and Frank J. Fabozzi Short Selling: Strategies, Risks, and Rewards edited by Frank J. Fabozzi The Real Estate Investment Handbook by G. Timothy Haight and Daniel Singer Market Neutral Strategies edited by Bruce I Jacobs and Kenneth N. Levy Securities Finance edited by Frank J. Fabozzi and Steven V. Mann Frontmatter Page iii Monday, July 18, 2005 12:27 PM Securities Finance Securities Lending and Repurchase Agreements FRANK J. FABOZZI STEVEN V. MANN EDITORS John Wiley & Sons, Inc. Frontmatter Page iv Monday, July 18, 2005 12:27 PM Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or oth- erwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rose- wood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Per- missions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies con- tained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. ISBN-13 978-0-471-67891-5 ISBN-10 0-471-67891-0 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Frontmatter Page v Monday, July 18, 2005 12:27 PM Contents Preface ix About the Editors xiii Contributing Authors xv PART ONE Securities Lending 1 CHAPTER 1 An Introduction to Securities Lending 3 Mark C. Faulkner CHAPTER 2 Securities Lending, Liquidity, and Capital Market-Based Finance 39 State Street CHAPTER 3 Finding a Route to Market: An Institutional Guide to the Securities Lending Labyrinth 57 Mark C. Faulkner CHAPTER 4 Evaluating Lending Options 79 Anthony A. Nazzaro CHAPTER 5 The Auction Process and Its Role in the Securities Lending Markets 87 Daniel E. Kiefer and Judith G. Mabry CHAPTER 6 The Fundamentals of Fixed Income Securities 107 Frank J. Fabozzi v Frontmatter Page vi Monday, July 18, 2005 12:27 PM vi Contents CHAPTER 7 Managing Liquidity Risks in Cash-Based Lending Programs 127 Ed Blount and Aaron J. Gerdeman CHAPTER 8 Quantifying Risks in Securities Lending Transactions 141 Mark C. Faulkner CHAPTER 9 Risk, Return, and Performance Measurement in Securities Lending 151 Peter Economou CHAPTER 10 Developing Effective Guidelines for Managing Legal Risks—U.S. Guidelines 167 Charles E. Dropkin CHAPTER 11 Tax Issues Associated with Securities Lending 179 Richard J. Shapiro CHAPTER 12 Accounting Treatment of Loans of Securities 205 Susan C. Peters PART TWO Bond Financing via the Repo Market 219 CHAPTER 13 Repurchase and Reverse Repurchase Agreements 221 Frank J. Fabozzi and Steven V. Mann CHAPTER 14 The European Repo Market 241 Richard Comotto CHAPTER 15 Overview of U.S. Agency Mortgage-Backed Securities 255 Frank J. Fabozzi Frontmatter Page vii Monday, July 18, 2005 12:27 PM vii Contents CHAPTER 16 Dollar Rolls 283 Frank J. Fabozzi and Steven V. Mann CHAPTER 17 Evaluating the Interaction of Dollar Rolls and MBS Investments 299 Anand K. Bhattacharya, Paul Jacob, and William S. Berliner PART THREE Equity Financing Alternatives to Securities Lending 315 CHAPTER 18 Equity Financing Alternatives to Securites Lending 317 Frank J. Fabozzi and Steven V. Mann INDEX 333 Frontmatter Page viii Monday, July 18, 2005 12:27 PM