PIPES Power Point Presentation

8/4/2019 PIPES Power Point Presentation

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Potential Intrinsic Performance

Evaluation System (PIPES)

PIPES is a patent-pending methodology for evaluating the performance of securities lending programs. The application of this methodologywithout the prior written authorization of Fitzburgh Consulting is strictly prohibited. The material contained in this presentation is alsoconfidential and should not be utilized, distributed or reproduced without the prior written consent of Fitzburgh Consulting.


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Fitzburgh Consulting 24/9/2012

Potential Intrinsic Performance Evaluation System (PIPES)

PIPES is a new approach for evaluating the intrinsic returns of securities lending programs

PIPES addresses two key obstacles to effective performance evaluations: Every programs lendable asset base is different and changes over time Programs operate at different utilization levels which change over time

PIPES adjusts for changes in lendable assets and utilization levels by evaluating eachprograms performance against the lendable asset base available for any given time period, atthe utilization level experienced during that time period

PIPES quantifies two dynamic performance benchmarks for any portfolio of securities at allpotential utilization levels. These two benchmarks together form a potential intrinsic returnperformance range or boundary, which can then be compared to the programs actual intrinsicreturns and utilization levels.

PIPES can incorporate program specific parameters that impact performance (e.g. -buffers, restricted lists, utilization limits, transaction costs, etc)


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PIPES benchmarks define a potential intrinsic performance range for agiven portfolio of lendable assets

PIPES Optimal

Security with the highest intrinsic fee is

lent first until supply is depleted, then security with highest fee fromremaining supply is lent next, etc

Quantifies the highest potential returnfor every level of risk and the lowestrisk for any level of return

Provides an optimal schedule ofintrinsic returns that reflects what arational investor should seek toachieve

PIPES Pro Rata

Securities lent in same static proportions

at all utilization levels. Intrinsic fees forindividual securities have no bearing onthe pro rata lending strategy

Quantifies the returns which result from apro rata or static proportions lendingstrategy for every level of risk

Provides a minimum level of intrinsicreturns that most professionally managedprograms should expect to exceed

PIPES dynamic performance benchmark definitions


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Performance decline due to program management or other factors?

PIPES analysis addresses this question.

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Q2 Performance

Q1 Performance


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PIPES Optimal is the upper boundary for return and the lower boundary for risk

Evaluation of Q1 performance based on Q1 lendable assets

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PIPES Optimal


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PIPES Pro Rata is the lower boundary for return and upper boundary for risk


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PIPES Optimal

PIPES Pro Rata


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Performance can be evaluated based on results relative to the PIPES benchmarks


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PIPES Optimal

PIPES Pro Rata

PIPES 50% Incremental Return


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Q2 performance was superior based on the PIPES analysis


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Q2 Performance

PIPES Optimal

PIPES Pro Rata

PIPES 50% Incremental Return


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Performance in Q2 was superior to Q1 based on the PIPESIncremental Return and Incremental Risk Ratios

18 14

27 1613 914 720 12

34% 77%

30% 45%

18% 34%32% 73%19% 39%22% 54%

89% 28%

PIPES Optimal Return (bps)

PIPES Return Differential (bps)

Intrinsic Return (bps)

Q1 Performance(30% utilization)

Q2 Performance(45% utilization)PIPES Return Analysis

PIPES Pro Rata Return (bps)

Q1 Performance(18 bps return)

Q2 Performance(14 bps return)PIPES Risk Analysis

PIPES Incremental Return Ratio

PIPES 50% Incremental Return Ratio (bps)

Utilization

PIPES Optimal UtilizationPIPES Pro Rata Utilization

PIPES Incremental Risk Ratio

PIPES Utilization DifferentialPIPES 50% Incremental Utilization


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Program comparison in PIPES risk-return space

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PIPES Incremental Risk Ratio

P I P E S I n c r e m e n

t a l R e t u r n

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Q2 Performance

Q1 Performance


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Some additional perspective on the PIPES analysis

PIPES evaluates relative performance - how well a program does in deliveringintrinsic returns based on the lendable assets available for a given time period

The PIPES benchmarks can incorporate many specific program parameters (e.g. buffers, utilization limits, restricted securities, transaction costs, etc)

Other program structure and operating characteristics change over time and can

have a significant risk/return impactProgram structure and operating characteristics that offer an intrinsic returnadvantage generally come at the price of higher risk in one form or another

Some examples include:

Accepting riskier types of non-cash collateral (lower quality, less liquid,adversely correlated to loaned securities, etc)

Lower margin requirements for collateral Lower average credit quality of borrowers More liberal borrower limits and/or reduced diversification Changes in collateral and on-loan asset statistical characteristics (e.g.

volatility, correlations)


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PIPES provides additional transparency and a strong foundation forperformance evaluations

PIPES provides a logical method to quantitatively assess the performance ofindividual programs over time

PIPES addresses two key obstacles to effective performance evaluations:

The lendable asset base for every program is different and changes over time Programs operate at different utilization levels over time

Other program structure and operating characteristics change over time andimpact expected performance. A complete program performance evaluation mustalso consider these additional factors

Fitzburgh Consulting or your current securities lending agent and/or consultant canutilize the PIPES analysis as an important part of your programs overallperformance evaluation


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Fitzburgh Consulting

Fitzburgh Consulting is committed to providing objective, insightful advice and analysis to help clientsmeasurably improve their securities lending programs. The firms primary focus is securities lending programevaluations, with special expertise in performance measurement and analysis. The company also providesresearch and educational services covering a broad range of securities lending related topics fromSecurities Lending 101 to more highly focused or specialized assignments. Fitzburgh Consulting offersservices to securities lending agents, consultants, beneficial owners, boards and their trustees/directors, andother industry organizations.

Sandy Fitzburgh is the founder and principal of Fitzburgh Consulting. With 10 years experience in securitieslending and over 25 years experience in investment management and financial services, Sandy brings aunique perspective to the industry. Prior to founding Fitzburgh Consulting, Sandy was Senior Vice Presidentof US Business Development for eSecLending in Boston. Sandy previously held a variety of senior positionsat JP Morgan Investment Management and Morgan Guaranty Trust Company in New York. Over the courseof his career, Mr. Fitzburgh has built a reputation for consistently providing high quality, objective advice andeducation, to organizations of all sizes covering a wide variety of investment and financial services topics.

Mr. Fitzburgh earned an MBA from the NYU Stern School of Business, a BS from the Wharton School of Business, and a BA in Economics from the University of Pennsylvania.

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