Automated Recall Management System (ARMS) Update

Beginning in 2002, the Securities Industry and Financial Markets Association (SIFMA), formerly known as the Securities Industry Association (SIA) before merging with The Bond Market Association (TBMA), initiated an industry-wide effort to automate Stock Loan Recalls. Most securities lending agreements provide the lender the right to recall securities that they have lent in circumstances where the lender has a deficit or otherwise no longer has the positions available to lend. These agreements also require that the borrower acknowledge receipt of the recall, and take action to return the securities, or face the risk of a buy-in if they are unable to return the securities. In the current environment, lenders issue recall notices to borrowers through a "print and fax" method, which SIFMA deemed both inefficient and lacking in accountability and audit trail. Given the growing volumes of securities lending transactions and the lack of agreed upon best practices for the handling of recalls, SIFMA established and published best practices recommendations in 2002. These recommendations included the establishment of a centralized mechanism for the electronic exchange and tracking of recalls; standards for the issuance of buy-in notification; standards for the exchange of buy-in confirmation; and record retention in accordance with regulatory requirements.

Throughout 2002, 2003 and 2004, Loanet developed an ARMS system for the benefit of its customers that meets the best practices recommendations published by SIFMA. This system incorporates:

• electronic issuance and tracking of recalls; a comparison feature that allows lenders and borrowers to identify and resolve differences in outstanding recalls;
• full connectivity to the Depository Trust Company (DTC) SmartTrak Hub to allow Loanet users to exchange recalls with non-Loanet services; and
• integration with the Loanet accounting system to allow borrowers to prioritize returns based on outstanding recalls.

Over the course of the last few years, many Loanet users have fully adopted electronic recall processing with other Loanet customers, resulting in increased efficiency and compliance with best practices.

Late in 2006, SIFMA convened a committee that recommended full adoption of the ARMS process industry-wide, including electronic messaging through the DTC SmartTrak Hub. A target date of February 2007 was originally recommended, however based on the state of preparedness of the industry, this date was revised to September of 2007. The committee continues to meet regularly to identify and resolve barriers to full implementation. As an early adopter of the original SIFMA best practices, Loanet has continued to assist in cross-platform testing with non-Loanet participants as those participants now move towards production.

In conjunction with this initiative, Loanet is convening a weekly conference call with its ARMS customers to keep those customers abreast of industry developments, and Loanet's efforts to assist the rest of the industry in the full adoption of ARMS. Look for future articles in the eNews, as well as Loanet Information Bulletins on this subject.

For more information from SIFMA, visit http://www.sia.com/arms/index.html.