Quadriserv, Inc.

1. Quadriserv, Inc. Futures and Options Expo November 2003

2. What is Stock Loan? • Pension fund/Plan sponsor is the “beneficial owner” of the securities. • The securities have additional value as collateral to borrow cash at low rates. • Beneficial owner lends assets through custodial bank. • The cash collateral is invested at a rate above the borrow cost. • Revenue is shared between the owner and the lender

3. The Current Process • Agent lender sends portfolio availability to prime brokers. • Hedge fund determines his PB can provide the security he wants to sell short. • After canvassing lenders by telephone, the PB borrows security then re-lends it to the hedge fund. • The PB re-lend “mark up” can be substantial depending on how “hot” the stock is.

4. Synthetic Lending through Futures • Stock loan can be effected synthetically using an EFP • The basis between stock and futures is comprised of dividends, transaction fees and carry costs • The IR component reflects the implied financing rate for a long position or rebate rate for a short position • Long stock holders can use futures to lend their position • Borrowers can achieve short exposure through the future

5. Synthetic Lending (long stock) • A customer who is long stock could synthetically lend their stock using an EFP transaction • The customer would sell their stock and buy the equivalent number of futures at a basis which implies incremental net lending income • The customer now has long exposure to the stock through the futures market

6. Synthetic Lending (GC short stock) • “GC” financing for shorts is generally Fed Funds less 20-30 bps (the interest received on cash from short sales) • Industry participants are able to finance long stock at Fed Funds plus 10-15 bps • The result is a spread differential of 30-45 bps • Thus, in absolute terms, the customer should be able to get short exposure through the futures market at better short rates

7. Synthetic Lending (special short stock) • Customers are charged a rebate rate to borrow “special” stock (they pay interest in order to borrow the shares) • The cost to borrow special stocks can be as high as a few hundred bps, depending on the issue, the broker,etc. • Given a broader base of potential “synthetic” lenders, the costs of borrowing special stocks could be reduced • The potential new revenue to customers long special stock can be realized

8. Synthetic Lending (cost structure) • The financing spread differential between cash securities lending and synthetic lending (using futures) is reduced by the transaction fees associated with futures clearing • For example, if short stock can be financed 35 bps cheaper using futures, then total transaction costs need to be less than $.35 per contract (per 100 shares)

9. Synthetic Lending (problems) • Problems with synthetic lending: • Active traders (stat arb hedge funds) may not want long exposure to the market in the form of futures. • Prime brokers may simply reduce short rates below competitive market rates, and kill the trade. • Long exposure through futures is a term loan. • Additional costs are incurred to either take delivery of the stock at expiry or cover the long prior to expiry.