# Indemnification Can No Longer Be Ignored The Conversation Continues

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[00:00:00.140] Hi, friends. Welcome back to another episode of Peer Connections, the podcast series brought
[00:00:08.450] to you by the Global Peer Financing Association, also known as GPFA. These podcasts offer our
[00:00:13.390] GPFA members and global beneficial owner friends a forum for information sharing and discussion
[00:00:18.190] on topics most important to them. And we hope you, our listeners, appreciate the insights,
[00:00:22.790] best practices, and transparency offered from our members and industry friends about securities,
[00:00:26.970] finance, or related investment areas. Now let's get into the episode.
[00:00:35.790] Welcome back to the Peer Connections Podcast, part of the GPFA.
[00:00:39.130] We're here today to discuss an extension of the discussion that was started a few weeks back on indemnification.
[00:00:44.690] My name is Chris Benesch. I'm a Portfolio Manager here at the State of Wisconsin Investment Board.
[00:00:48.690] And joining me today are Matt Burnett from Norges Bank and Jerry May from Ohio PERS.
[00:00:53.830] Matt and Jerry, do you guys want to take a minute to introduce yourselves?
[00:00:56.830] Sure. Hi, I'm Matt Burnett, Global Head of Financing.
[00:01:00.610] We run an unindemnified securities lending program through an agent lender.
[00:01:05.470] Hi, I'm Jerry May. I am a Senior Portfolio Manager at Ohio PERS. Our program is run through an agent
[00:01:11.550] lender and we do have indemnification. We're involved with not only the lending portion of
[00:01:18.230] the program, but we also manage all of the cash collateral as well. Thanks guys. And thanks for
[00:01:23.450] joining us today. So this discussion was really prompted in part by a white paper that was
[00:01:28.210] released by Mark Faulkner earlier last year called Something Better Changed. Securities
[00:01:33.110] lending indemnification is unsustainable in its current form. It's triggered some interesting
[00:01:37.290] discussion, I think, amongst beneficial owners, particularly as we saw in the last podcast between
[00:01:41.910] Mark and Matt. And I think what we wanted to do was continue to extend that discussion,
[00:01:47.310] bring in a few more voices and viewpoints. So thanks for being here today. Maybe by way of
[00:01:52.150] introduction, I just wanted to touch briefly on what we mean by indemnification in this context.
[00:01:57.090] So in a securities lending transaction, I think as many of you know, there is a situation that
[00:02:02.750] may occur where a borrower may fail to return the securities that they have borrowed. And if that
[00:02:08.410] were to happen and the collateral that's being held is insufficient, oftentimes the agent will
[00:02:13.850] step up and indemnify that transaction and make the lender whole. And that's what we're really
[00:02:17.950] talking about here when we talk about indemnification and what might be changing in
[00:02:21.350] the industry. In the last podcast, Matt, you talked a lot about your view and your relationship
[00:02:26.290] to indemnification. And maybe just by way of recapping a little bit, you could share a little
[00:02:30.970] bit more, Matt, about how you guys view indemnification, how you use it today.
[00:02:35.680] Yeah, sure. Thanks, Chris. So I'll try not to repeat myself too much here and try to touch
[00:02:40.860] on a few different points. But one thing is I think there's some principles that we thought
[00:02:45.140] about along the way. And when I say along the way, this is a process that takes time to go
[00:02:50.020] from an indemnified program to being comfortable to managing risk yourself. The first is that the
[00:02:55.100] agent lenders indemnification or their balance sheet may get in the way of your own strategy.
[00:03:00.600] So an agent lender has to find trades and risk that works for all of their clients, not just you yourself.
[00:03:07.820] So that's something to consider and something we considered.
[00:03:10.980] And it's also worth thinking about what is indemnification actually worth?
[00:03:14.940] So when we took this conversation, it was more of most of the agents are banks and most of your counterparties are banks.
[00:03:22.960] So the credit quality of your agent lender and their ability to indemnify you is probably pretty highly correlated with the borrowers they're looking to indemnify.
[00:03:33.140] So one of the things is if you are indemnified, it may be worth assessing your agent's ability to cover that indemnification.
[00:03:41.320] How much are they indemnifying? I think is a fair question.
[00:03:44.420] What types of trades are they indemnifying outside of you?
[00:03:47.040] So beyond putting in analytics, databases, trading competency, et cetera, there's a few
[00:03:54.580] things that sort of have to scope how you think about risk rather than just how do you
[00:03:58.520] transact when that default does happen.
[00:04:00.840] One of our core principles was we didn't want to outsource risk management.
[00:04:05.400] And that carries forward to this day when we think about things like CCPs, et cetera,
[00:04:10.440] but we'll save that conversation for another time.
[00:04:12.660] But critically, even if there are very few defaults in this industry, there's still a lot of decisions that you have to make.