2009 annual report

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(1)www.abc-arbitrage.com. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. 2009 annual report.

(2) WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718.

(3) WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. ABC arbitrage Group 2009 annual REPORT.

(4) Laying out the ground rules We have done it. We have achieved the goals of Horizon 2010 a year ahead of schedule, with close to €7m more than the high end of our forecast presented in 2006. What conclusions can we make about the last four years? First, thanks to our teams for having worked so hard during this period as they have in previous years. It is true that this achievement is not just due to 48 months of effort, but is the result of a wider series of investments and commitments spanning a decade. Ten years of work, ten years of dedication, based on accepting a contract that links compensation to performance and is never taken for granted; it is also a demonstration that profits and dividends are the true benchmarks of our conviction. Second, thanks to our shareholders, whether “big“ or “small“, for having understood and endorsed our Horizon 2010 plan. Let me reiterate what I said in 2006: I am convinced that the implementation of this project has been essential for your group’s success.. 2. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. And now, on to Horizon 2015!.

(5) Some people have said to me that we have been lucky and should be thankful for the “crisis“! I do not agree. This crisis is without precedent in the markets and several financial structures with different models have unfortunately not been able to resist the pressure. This means that to perform the way we have, we needed efficient systems and processes, as well as totally focused teams to get over the hurdles. Things do not happen by chance or because of luck, nor do they happen as a result of gambles. Does this mean we should be satisfied with ourselves and rest on our laurels? You know that over the last ten years, through my annual message, that this has never been my state of mind, nor that of our teams. This is why we have chosen to close Horizon 2010 now in order to launch Horizon 2015 and thus regenerate our ambitions for the next five years. Properly finalizing Horizon 2010 will be the key to success for Horizon 2015. We therefore have to honor the moral contract between us announced in 2006 and move forward. This contract is based on the sharing of wealth created by the shareholders and employees of the group. Based at the start on a “maximum“ of €100m in five years and €1.5 of distributed dividends, it is clear that the teams have surpassed themselves by reaching the goal a year ahead of time. That is why I want this “fair share“ principle to be the basis of a new contract for the coming years.. 3. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. This accomplishment has allowed our loyal shareholders to receive €2.36 in dividends since January 1, 2006 and to see our stock price rise from €2.25 at the end of 2005 to close to €7 in 2010..

(6) So getting Horizon 2015 right is another new challenge for us after the high performance levels of these last few years! We have decided to remain ambitious, even very ambitious, by proposing a target of €250m over the next five years, i.e. 2.5 times the amount of our previous profit forecasts! I remember how incredulous some people were when we announced our 2010 project. These same people will probably react in the same way this time! However, everything is possible when you clearly lay out the ground rules. It is true that today, we do not yet know how to produce this level of profitability. If we were producing results at that pace in the first quarter of 2010 (the first of 20 quarters for the project), it would be too simple and would not really amount to a challenge! So, while we know that we have not reached cruising speed yet and that we do not have all the tools and all the arbitrage opportunities and methods to produce €250m over five years, we are nevertheless convinced that this goal is achievable by a close-knit and highly professional team.. 4. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Launching Horizon 2015 in the wake of this success is essential to avoid a year without challenges, incentives or motivation. Speaking of motivation, it should be said that it is a matter of striking a delicate balance. Money may not be the sole driving force, but it is without doubt an important element of recognition for everyone, both staff and shareholders, and it allows people to achieve personal goals or do things they passionately desire which are essential for their wellbeing and to spur on renewed motivation. I am convinced that a medium and long term compensation system will once again form the basis for a convergence of interests between shareholders and staff. I am sure that it is also a very efficient tool, when properly designed and implemented for our business, to lower risk and to dissuade fraudulent actions, an ongoing concern in the financial sector..

(7) One major tool does already exist and is working as planned! Our new offices, which benefit from state-of-the art tools, allow people to share ideas more efficiently and to be more responsive. As I write these lines, we have even come through a record power failure in Paris, without being affected in any way. This would probably not have been possible in our former offices. If our move was relatively costly, in terms of energy, stress and expenses, it has already proven itself to be a worthwhile investment and without question to be a pillar of our future success. Talking about “energy“, our annual report has always been a means of expressing our convictions and our ambitions through the creative use of a word here and a phrase there to establish an essential connection between our operating staff and our shareholders, as well as our partners and prospects. This year, we have chosen to let you discover our group in a fun and interactive way, to enable you to enrich your knowledge of ABC arbitrage while enjoying yourself. I hope that with this new format, you will take pleasure once again in exploring our world and that you will be, as I am, proud of our group and our teams. Dominique Ceolin Chairman of the Board. 5. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. New territories, new strategies, the development of third-party asset management services are all elements that will allow us to develop our business significantly, without forcing matters and whilst continuing to choose our risk scenarios..

(8) P.8. P.20. P.30. P.37. P.45. P.62. Table of contents 2009 annual Report BELIEVE IT OR NOT. SPOT THE DIFFERENCE. Highlights 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P.8 Everything about financial arbitrage . . . . . . . P.16. Innovation and industrialization . . . . . . . . . . . . . P.37. dress up. PUZZLE. Risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P.45. The group’s business . . . . . . . . . . . . . . . . . . . . . . . . . P.20. Key words. build it!. Development potential . . . . . . . . . . . . . . . . . . . . . . . P.62. Operational organization . . . . . . . . . . . . . . . . . . . . . P.30 6. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009.

(9) Credits: Publisher: ABC arbitrage/Julien Aumont P.73. Design & production: Agence Aristophane/Michaël Zana Creative director: Delphine Bommelaer Artistic direction/Illustration: Yann Lacombe Copywriter: Michel Celemenski. Sub-editors: ABC arbitrage/Amarante Dufour Aristophane/Claire Godeau Photos: © Gaëtan Bernard Istockphoto Printers: Print speed. P.92. who’s who. Financial report. Governance and partners . . . . . . . . . . . . . . . . . . . . P.73. Management report . . . . . . . . . . . . . . . . . . . . . . . . . P.108 Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P.118 Statement of income . . . . . . . . . . . . . . . . . . . . . . . . . P.119 Statement of comprehensive income . . . . . . . P.119 Statement of changes in equity . . . . . . . . . . . . . P.120 Consolidated cash flow statements . . . . . . . . . P.122 Notes to the financial statements . . . . . . . . . . . P.123 Statutory auditors’ report . . . . . . . . . . . . . . . . . . . P.137. psy & co. Our teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P.82. FAq. The shareholders’ section . . . . . . . . . . . . . . . . . . . . P.92 7. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Lay out: Johanna Abettan. P.82.

(10) 8. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. ANNUAL REPORT Dec. 31, 2009.

(11) How does 2009 chalk up after an “unbelievable“ year in 2008? Continuing crisis or beginning of an upturn? Gloomy times or year of opportunities? For ABC arbitrage, these questions are not on the agenda since the response is always positive. A look back at 12 successful months.. 9. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. believe it or not.

(12) ANNUAL REPORT. 42%: USA 11%: Europe 2%: France 45%: Others In 2009, the “pie chart“ of ABC arbitrage’s average ongoing transactions became even more international, with 45% of ongoing engagements invested in stock markets outside the dollar and euro zones. This is a relevant indicator of the group’s geographical diversification and its ability to benefit from significant opportunities in new markets in 2009, based on its adaptability and development resources.. e0.75 That is the total 2009 dividend per ABC arbitrage share, with no changes on 2008, thus representing a yield of 11% based on the stock price at December 31, 2009.. 2009 vintage. A very good year for Château ABC €30.4 m Consolidated net income. After an exceptional 2008 vintage, due to record levels of volatility and very high volumes of trade, 2009 also comes in as a very good year. With a consolidated net income at €30.4m, ABC arbitrage registers its second-highest level of annual profits ever and a 15th straight year of positive earnings. What makes the Château ABC 2009 harvest particularly gratifying is that these results were achieved in a much less volatile market, with relatively weak levels of market transactions. This performance demonstrates ABC arbitrage’s capacity to produce results in all market conditions on the strength of its operating instruments developed over several years. As the French say, great châteaux distinguish themselves in lesser years. 10. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Average ongoing transactions Globetrotting. Dec. 31, 2009.

(13) believe it or not. Just move it At the beginning of 2010, ABC arbitrage moved into its new offices 18 rue du Quatre Septembre in the 2nd arrondissement of Paris. The group now has a state-of-the-art market room. The landscape office encourages closer contact and cooperation and better information flow, benefiting the business. And the added bonus is that the setup is designed to avoid any interruptions, with independent electrical generators taking over in case of power failures, as well as high-performance air conditioning systems to keep IT systems cool at all times.. ABC on the rise In 2009, ABC arbitrage continued to distinguish itself, remaining in the leader’s pack of high-performance stock values, with a rise of 32.93% for the year, at €6.58 on December 31, 2009. Over the last three years, ABC arbitrage is 9th in terms of growth in the SBF 250 overall in compartment B of Euronext Paris and 3rd for its dividend yield.. 11. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. l Coo.

(14) ANNUAL REPORT. Dec. 31, 2009. Given that a good deal of future performance levels are based on its ability to innovate and improve its access to global markets, the ABC arbitrage group is focused on its R&D and control of information, the main driving forces of its success. In 2009, the company progressed in leaps and bounds in its capacity to manage data and execute orders. In fact, arbitrage demands increasingly sophisticated technical capabilities. Upstream, this means gathering and processing wider sets of data more and more precisely. Next, on the basis of these real data, engineers model the behavior and interaction of different factors, thus enabling the simulation of arbitrage scenarios in “laboratory“ conditions. Once these tests are proven to be positive, operating teams take over to implement efficient processes and constantly increase the speed of execution and the number of automated operations. This is where IT experts come into play, developing and rolling out faster and more responsive systems. At ABC arbitrage, getting faster and reaching new heights of performance is what makes us stronger for the future.. 12. Horizon 2010. In 2006, ABC arbitrage launched its “Horizon 2010 Project“, a stock-based profit sharing scheme for employees and managers targeting accumulated profits of €100m over five years. With over €106m in earnings accumulated between 2006 and 2009, the goal was reached one year ahead of schedule. In comparison, between 2001 and 2005, accumulated net earnings stood at €31.7m.. Targeting ahead. Horizon 2015. In the wake of the success of the “Horizon 2010 Project“, the board of directors, after having consulted with operational managers, will unveil the “Horizon 2015 Project“ to the Annual Shareholders’ Meeting, targeting €250m in net consolidated earnings over the next five fiscal years. Beyond the financial interest for shareholders of this program, the group is seeking to provide its teams with the resources and motivation to generate long-term commitment, which has always been the driving force of its success.. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Faster, higher, stronger. Ahead of target.

(15) believe it or not. ABC Planet: choose your world. Future worlds?. Idea 1. The ABC world today. Main parameters of the 30% rise of net revenues between 2007 and 2009, i.e. an increase of €14m*. 24% 9%. 30% 23%. Development strategies Idea 2. Optimization/industrialization Idea 3. Volatility **Data based in part on subjective assumptions.. Exploring new areas of the arbitrage universe The ABC arbitrage group is constantly exploring new parameters in its world of activity. In 2009, the group expanded its scope of research to examine entirely new business opportunities.. There are so many possibilities open to the group: a new third-party asset management program, arbitrage operations in new asset classes, the search for new products with a higher profit-to-risk ratio, geographical expansion, etc. However, while ABC arbitrage may be doing some sky gazing to define the new scope of its Horizon 2015, two things remain certain: the group will not stray from its core business and will continue to implement its policy of rigorous testing before committing itself. It is what is commonly known as keeping your feet on the ground. 13. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Geographical expansion Idea 4.

(16) ANNUAL REPORT. Dec. 31, 2009. Fund fundamentals. 17%. A new investment fund to be launched in 2010, ABCA Reversion This fund is different from its predecessor, which is focused on M&A arbitrage. While this fund will also be dedicated to arbitrage with exogenous risks, it will focus among other things, on statistical inconsistencies in futures markets. From the start, ABC arbitrage will itself invest in this fund alongside outside investors, not only because this is a fundamental principle in the group’s operating methods, but also because the amount of assets to be committed and the industrialized process to be applied will generate economies of scale and optimize operational efficiency.. Unruly regulation. Doing more harm than good? There was a lot of talk in 2009 of new measures to “moralize“ financial services in G20 countries. This has led some public authorities to regulate the markets to avoid systemic risks and the use of overleveraged derivatives with inadequate solvability coverage (directly linked to the sub-prime fiasco). Also, in a crisis situation, it is essential to limit individual abuse, with some people earning huge salaries even when their companies lose money. The problem today is that the financial services sector as a whole has become a “scapegoat“ as a result of the dealings of some irresponsible people. ABC arbitrage worked hard in 2009 to avoid that the political remedies being proposed do not do more harm than good. 14. and 20/20 vision That is why the group has closely scrutinized its compensation policy and internal auditing systems to ensure that remuneration rewards value creation and that operational risks are controlled to the utmost. An in-house survey concluded that the internal rules of ABC arbitrage were more stringent than the recommendations of the G20 task force. But, beyond the moral issue, rules have been designed to avoid abuse, but not to impede business initiative, an essential balance to be maintained to ensure future success.. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. As of December 31, 2009, ABCA Arbitrage Opportunities Fund Plc, an alternative investment fund (an Irish non-UCITS fund) focused on merger and acquisition (M&A) arbitrage, had €35m in third-party assets to manage. The fund chalked up a third consecutive year of profits, with accumulated earnings of nearly 17% since July 2007. This was achieved despite an unfavorable environment, which made the portfolio’s pooling operations more complex and exposed earnings to a higher level of failed M&A operations.. earnings since July 2007.

(17) believe it or not Surf or sail?. For connoisseurs, volume and volatility are the two main boosters of the arbitrage business, as demonstrated in 2008, a record year for the ABC arbitrage group which rode the wave of very turbulent markets. However, it is a double-edged sword since some pundits claim that arbitrage depends too heavily on market conditions and that, in calmer seas, those who surf the waves of volume and volatility cannot adapt to normal conditions.. In fact, the ABC arbitrage group has from the outset worked hard to be able to navigate and move forward at all times and to generate results whatever the market conditions. Thus, in 2009, despite a significant decrease in volume and volatility (comparable to the average levels of the last 10 years), the group registered its second-best level of earnings ever and also maintained its average number of ongoing transactions (1100 in 2009 compared 1150 in 2008). Furthermore, the group extended its activity to more than 40 stock marketplaces around the world. This continuity, despite the change of conditions, clearly demonstrates that it is smooth sailing for ABC arbitrage even when waves are calm.. Volumes. VOlatilitY. Sources: Bloomberg. 15. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Volume and Volatility: arbitration drivers?.

(18) ANNUAL REPORT. Dec. 31, 2009. I. How much do you know about arbitrage? 1. financial assets) or markets. Financial markets offer a wealth of opportunity for this. For example, companies with large market capitalizations may be listed in a number of countries and on several different markets. They often issue large quantities of derivative instruments such as warrants and convertible bonds. Pricing discrepancies between these various market listings and their hedging instruments generate arbitrage opportunities.. ow can we define the arbitrage H business?. Arbitrage is a combination of several operations generating earnings without risk by simply benefiting from imperfections between different financial markets. Arbitrage ensures equal prices at any given moment in time. It ensures fluidity between different markets and contributes by supplying liquidity. It is a basic operation which guarantees market efficiency. (Source: Vernimmen). 2. 3. hat is the fundamental W technique used in arbitrage?. Based on common sense, arbitrage uses only mathematically measurable data taken directly from market activity and leaves no room for speculation. It is simply a matter of exploiting inefficiencies in the financial markets through the application of scientifically-grounded analytical methods.. hat is the working principle W of arbitrage?. It is a quantitative investment technique designed to take advantage of price discrepancies between financial instruments (such as two comparable. 16. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. n 12 clear and simple questions, you can learn what financial arbitrage is all about and how ABC arbitrage practices its business in the markets. You will discover that this profession is not, as is often wrongly assumed, something obscure or mysterious which upsets market dynamics without making any positive contribution. On the contrary, arbitrage is useful for both issuers and shareholders in that it provides liquidity to markets and operations and is useful in rationalizing regulatory measures in that it contributes to greater transparency. Arbitrageurs are therefore useful for the proper functioning of markets and the economy..

(19) believe it or not. 6. Is there a specific approach that differentiates the ABC arbitrage method?. There are essentially two major types of arbitrage strategy, mainly involving equities and equity derivatives: arbitrage without market risks and arbitrage with market risks. • Arbitrage without market risks involves transactions without any directional or event risk. These operations are fully hedged and subject to a strict convergence protocol within a predefined timeframe. Exposure is limited to operational risk such as hedging errors, calculation errors or custodian default. A classic example is exchange arbitrage, which exploits pricing discrepancies in a financial instrument traded on several different exchanges, although the margins earned on this business are almost non-existent. • Arbitrage with market risks, unlike arbitrage without market risk, involves certain convergence risks. A typical example is “risk arbitrage“, which involves buying the stock of a company subject to a takeover bid or swap offer and selling the stock of the acquiring company. However, a number of suspensive conditions could cause the deal to fail, for example the requirement for the acquiring company to obtain a minimum percentage of the target for the offer to go ahead. For these strategies, risks are systematically identified and hedged.. ABC arbitrage applies a strict definition of arbitrage and is only involved in transactions where the price convergence process follows a specific set of rules. The group never speculates on any potential event, nor does it ever try to predict whether a financial asset will go up or down. These transactions are designed to produce results that are independent of movements in the markets, exchange rates or interest rates. ABC arbitrage carries out a wide series of operations designed to draw the benefits of unjustified price differences between convergent financial instruments. The group considers these differences to be effectively “unjustified“ solely on the basis of objectively measurable mathematical or statistical processes. “Objectively measurable“ means that the results are identical over time and are not influenced by the operator involved in the measurement.. 5. re there different arbitrage A types or families?. ould this technical C expertise be used to speculate on the markets?. This rational approach leaves no room for rumors or speculation. Unlike speculators, who react to all kinds of short-term information, arbitrageurs trade on a rational basis using a very specific model. They never try to predict which way the market will go and always reason in terms of relative value. They buy one product and sell another simultaneously, spreading their risk over a large number of trades. Through their action, arbitrageurs in fact contribute to reducing market volatility because they do not practice “naked short selling“, which means that they do not sell assets in advance and therefore never speculate. Since each sale is backed by the purchase of a correlated product, they supply essential liquidity to the markets.. 7. oes ABC arbitrage prefer D any particular arbitrage type or family?. The balance between the two arbitrage types or between geographic areas depends mainly on opportunities identified in the market, bearing in mind that the priority is to develop, as much as possible, arbitrage strategies without market risks which in principle are not limited in terms of volume. The group’s growth is based on taking advantage of the full range of market opportunities. To do so, it deploys the necessary resources to produce sustainable profitability, through the conception of new arbitrage classes. This determination to be a multi-strategy player, focusing on systematic and global development opportunities, has been a cornerstone of the group’s approach from the outset and has allowed ABC arbitrage to benefit from most variations in market conditions. 17. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. 4.

(20) ANNUAL REPORT. Dec. 31, 2009. Question 7 continued. 2009 breakdown of arbitrages by risk type. ABC arbitrage: mutualization and diversification. Average number of arbitrage transactions. Average positions (value). 9%. 25%. ABC arbitrage continues to spread its risk. The group now operates in more than 40 financial markets worldwide and the number of arbitrage positions held in the portfolio averaged more than 1,100 in 2009. This diversification strategy helped ABC arbitrage to capture a large number of opportunities.. 75%. 91%. Arbitrages without market risks. Arbitrages with market risks. In 2009, the average number of arbitrages held in the portfolio was 1,100.. The breakdown between different arbitrage families was further accentuated, with a preponderance of arbitrage without market risks in terms of the number of transactions held in the portfolio. The family of arbitrage with market risks was negatively affected in 2009 by the low number of new M&A operations and their relatively low level of financial commitment.. 2009 breakdown of the average number of arbitrages by geographic area, all strategies combined Average number of arbitrage transactions. Average positions (value). 14%. 27%. 11%. 45%. 3%. 2%. 40%. 57% Euro Zone (outside France). France. USA. Others. 8. driven arbitrage, which depends on the type and volume of instruments issued and the extent of market ‘turbulence’. The group has therefore chosen not to restrict its activity to any product type or specific geographical area. The group does not try to forecast market trends, but simply develops a range of complementary strategies, applicable to changing conditions.. hat is arbitrage W sensitive to?. Some types of arbitrage may be sensitive to changes in the stock market environment. This is particularly true for risk arbitrage, which is influenced by the number and size of takeover deals in the market, and applies as well to volatility-. Volatility Interest rates ; Interest rates x cac; cacx cac;;; High volumes Low volumes euro Corporate credit spreads Credit crunch Regulations. Arbitrages with market risks. Arbitrages without market risks. ABC arbitrage’S BUSINESS. ++ ++ = + + ++ = +. ++ + = + ++ = + +. ++ + = = + = ++ = = +. 18. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. During 2009, ABC arbitrage operated in over 40 different financial market places..

(21) believe it or not. 11. The activities of the group contribute to the interests of both. By encouraging issuing companies to be clear, precise and respectful of their commitments, we contribute to healthier governance and better management. And then, through its precise interventions, the group ultimately defends the interests of all shareholders and in particular smaller investors, by providing the needed liquidity to the purchasing and sales process.. ow can arbitrage H progress?. Arbitrageur: a useful market player. Given that the environment is constantly changing and given the group’s determination to benefit from any given scenario, ABC arbitrage continues to search methodically for new technical and geographical opportunities to enhance its performance and profitability. The increase in the number of operations and the development of new arbitrage formulas allows the group to compensate for the natural decrease in margins, but allows it to diversify its business to lower risk and increased revenues, as part of an overall industrialization strategy.. 10. Arbitrageur’s functions:. Contributes to market liquidity Partners with issuers Acts as a catalyst for increased transparency Defends minority shareholders. ow can changes in stock H market regulations affect the group’s business?. Helps to limit market volatility. ABC arbitrage studies these rules diligently, looking at things such as the convergence mechanisms of derivatives or at the takeover prospectuses of merger and acquisition operations to check and control the principles as they are published and to point out any anomalies objectively. Technically, ABC arbitrage transforms contracts and regulations into equations. Its market regulations expertise is a key part of the group’s know-how and an integral part of all arbitrage operations. The AMF consulted ABC arbitrage during the fourth quarter of 2008 to work on a task force looking at short selling practices, which demonstrates that its expertise is appreciated in this area.. 12. ith so many changes going W on constantly, how can companies like ABC arbitrage remain consistent in their approach?. From the outset, the company has had a shared philosophy, which has contributed to its continued success: always remaining open and curious in order to develop new formulas that increase efficiency and develops its expertise. Since 1995, the group’s basic values have remained the same: method, precision, simplicity and determination. 19. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. 9. oes the approach of the D ABC arbitrage group favor issuers or shareholders?.

(22) To understand the group and its business activities, we invite you to put together this jigsaw puzzle. You will discover how the pieces fit together in ABC arbitrage, providing strength and consistency to the group.. BOARD (OF DIRECTORS) GAMES 20. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009.

(23) 21. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Puzzle: Jeu de société.

(24) 22. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009.

(25) Cut out each piece of the puzzle and put them together to get an overall picture of the ABC arbitrage group.. 23. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. PUZZLE.

(26) 24. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. ANNUAL REPORT 12-31-2009.

(27) PUZZLE. The right fit between various business units ABC arbitrage, the group’s parent company, was founded in 1995. It is an investment consulting company and financial services provider and is listed on Euronext Paris, compartment B. ABC arbitrage provides its wholly-owned operational business unit, ABC arbitrage Asset Management, with traditional holding company services: communications and human resources management, legal expertise and administrative services. It also provides its operational business unit with support in developing its third-party asset management services. ABC arbitrage Asset Management, the group’s operational business unit for market trading activities, was founded in late 2003. It is a member of the French Management Association - Association Française de Gestion (AFG) - and has an extended portfolio management company license from the French market authorities - Autorité des Marchés Financiers (AMF) - allowing it to market its expertise to outside institutional clients and to manage alternative investment funds in foreign jurisdictions. It employs 90% of the group’s total workforce. In August 2008, ABC arbitrage Asset Management was authorized by the AMF to operate as a provider of regulated derivatives, as part of its exclusive portfolio management mandate. 25. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. A clearly-defined structure.

(28) Annual REPORT Dec. 31, 2009. The group’s business he group focuses on the development of exclusive arbitrage strategies, applying a selective opportunity-driven business model. Its main goal is to produce high levels of profitability every year and to ensure sustainable growth. Since its creation in 1995, ABC arbitrage has benefited from the development of new financial markets and products. The group firmly believes that this trend will continue to provide the arbitrage business with new fields of endeavor and growth opportunities. In this regard, its third-party asset management offer is designed to provide an additional source of revenue and increase the group’s equity value.. 1/Proprietary asset management. 2/Third-party asset management. ABC arbitrage, the group’s parent company, is ABC arbitrage Asset Management’s main client. ABC arbitrage also invests part of its funds in ABCA AO while the remainder is managed under mandate (see the group structure next page).. Asset management for third parties only involves arbitrage strategies and financial instruments which, for the most part, are traded on organized markets. Under its risk-management principles, the strategies developed by ABC arbitrage Asset Management only involve financial instruments with a level of liquidity and market capitalization appropriate to the inherent risks.. 26. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. T.

(29) In late 2004, ABC arbitrage Asset Management, which is the unlisted and wholly-owned subsidiary of ABC arbitrage, obtained a restricted asset management license from the AMF, enabling it to manage funds on behalf of institutional clients under third-party mandates. The license was extended by the AMF on March 6, 2007. This was a major milestone in the group’s strategy to develop its third-party asset management business, since ABC arbitrage Asset Management can now propose and manage its own foreign investment funds.. As a qualified investor funds under Irish law, the funds are only open to: – any natural person with a minimum net worth (which excludes main residence and household goods) in excess of €1,250,000; or – any institution (being an entity other than a natural person): * which owns or invests on a discretionary basis at least €25,000,000 or its equivalent in other currencies; or * the beneficial owners of which are Qualifying Investors in their own right.. In early June 2007, the group set up its first alternative investment fund, ABCA Arbitrage Opportunities Fund Plc (ABC AO), an Irish nonUCITS. Its third-party asset management offer is to be extended in 2010 with a second fund, ABCA Reversion. The goal of these investment funds, which manage some of the arbitrage strategies successfully developed by the group since 1995, is to generate returns that are independent of market trends.. The recommended minimum subscription is €5m, although the funds only offer one type of unit for which the regulatory minimum subscription is €1m. ABC arbitrage is itself the first investor in each of its third-party funds. On April 30, 2010, ABCA Arbitrage Opportunities Fund Plc, managed €53m, including just under €21m invested by ABC arbitrage. 27. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. PUZZLE.

(30) Annual REPORT Dec. 31, 2009. 28. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. A simple and consistent group structure.

(31) PUZZLE. Since August 2007, the market environment has not been conducive to raising assets, as most investors have tended to postpone their investment decisions. This situation does not in any way preclude the group’s strategy to gradually increase its third-party asset management offer, given its track record of strong performance every year since the company was founded.. While recalling that recent regulations in this field have seen a great number of changes, the group is gradually pursuing its development project for third-party asset management in line with its initial policies, i.e. without haste and above all preserving its track record of consistent profitability.. 3/Advisory services. In line with previous announcements, the creation of third-party asset management activities did not create significant additional costs for the group (either in terms of structure or marketing and commercialization costs), but, on the contrary, generated additional revenues.. However, ABC arbitrage has no immediate plans to develop sales of its arbitrage know-how on an advisory basis or to widen its client base. These initiatives are done on an ad hoc basis and are not a major area of growth for the group.. Based on performances in previous fiscal years and on possibilities, as defined by the regulatory framework, ABC arbitrage Asset Management could create new funds to deploy other arbitrage strategies.. ABC arbitrage group performance 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 ABCA gross return on equity. 34%. 50%. 47%. 71%. 91%. 87%. 109%. 65%. ABCA return on equity (ROE). 13%. 21%. 16%. 23%. 39%. 37%. 52%. 32%. -34%. 16%. 7%. 23%. 18%. 1%. -43%. 22%. 3%. 15%. 10%. 8%. 14%. 13%. -19%. 19%. CAC 40 CSFB/Tremont HF Index. 29. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. With its established expertise in the financial markets, the group is also in a position to propose financial engineering consulting services for thirdparty institutional clients or qualified investors..

(32) WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009. tion a z i n a n org sist a f o h ngt city to re e an e r t s The s capa is in a sens llenge or, x t i d n a cha ple ure press hitectural east, a com ts of arc he very l ade of se ocks. at t ucture m ilding bl str anced bu bal. 30.

(33) 31. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. BUILD IT!.

(34) Thus, the two main pillars of ABC arbitrage, research and execution, are supported by a Board of Directors, an Operations Department and a Corporate Secretary, all of which provide stability and the resources needed to carry on the business. Overall operations are scrutinized by a business control department which monitors the solidity of the components and the processes.. 32. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009.

(35) BUILD IT!. A. BC arbitrage Asset Management has a simple organization structure based on the interaction of several major departments supporting revenue-generating operations. The group is constantly fine-tuning its organization to adapt to changes in the market and to maintain its competitiveness and strengthen its efficiency. An overriding principle is applied throughout the organization: the separation of functions. Thus, in terms of efficiency, this principle allows each person to be empowered to contribute their skills within an area of expertise and, in terms of governance, it ensures that cross-corporate control is embedded into the organization, thus maintaining permanent internal audits.. Management is structured on the basis of a balance between decision-making and implementation, with respectively a Board of Directors and an Executive Management Committee. The “Control“ Departments report directly to the Board of Directors and comprise two Independent units: “Finance/Internal Control” (directed by the Compliance and Internal Control Officer) and “Market Risks”. The “Corporate Secretary“ is responsible for representing the company in its dealings with the market authorities and related bodies and provides support in enforcing strategic and management decisions. The “Operations“ Departments, which identifie, implement and manage day-to-day business, employ three quarters of the company’s workforce.. BUILDING BRIDGES BETWEEN RESEARCH AND OPERATIONS The group’s main drivers are research, innovation and a systematic approach to its business. To maintain momentum, teams are continuously seeking to develop original arbitrage strategies and are always on the lookout for new ideas. These strategies are developed by the “Operations“ function and put to “Executive Management“ for approval. The “Operations“ function unites all departments in charge of “Research“ and “Execution“. These units work in close synergy. All “Operations“ Department employees are empowered to propose new strategies, which are then subjected to a full review process, including preliminary research and operational validation before being implemented. ABC arbitrage currently has about 15 profit centers operating arbitrage strategies which are already active or in the process of implementation.. 33. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Project managers and project execution.

(36) production. 34. Study. Capitalization. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. tests. Monitoring. Annual REPORT Dec. 31, 2009. Preliminary study.

(37) BUILD IT!. • The “Information System“ and “Statistical Analysis and Modeling“ Departments design and develop internal statistical analysis, valuation models and information systems tools required to execute arbitrage strategies on an industrial scale.. • The “Stock Market Law“ teams provide operational support through their legal expertise, including monitoring the legal aspects of transactions and compliance with regulations in market transactions.. • Market operators play a critical global role. From initiating ideas to identifying opportunities, they implement, execute, trade and monitor arbitrage transactions. • The “Financial Operations“ Department negotiates and manages changes, and handles the compensation or closure of security loans for clients. Financial operators handle asset management (securities or cash). They also seek and select counterparties for stock lending transactions and are in charge of technical relations with them.. 35. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. • The “Research and Analysis“ Department conducts all preliminary work upstream of strategy implementation, including research, interpretation, classification and sourcing of all information required for the business to operate properly..

(38) ABC arbitrage. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Ordeal or challenge?.

(39) innovation. Spot the. Arbitrage technique essentially involves spotting two types of differences. On one hand, the arbitrageur above all seeks to find and correct market anomalies. On the other hand, the arbitrageur seeks to reduce operational errors linked to work processes. He cultivates his discernment and digs deep to develop new varieties of arbitrage and to increase product diversity.. 37. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. differ nce.

(40) We invite you, like an arbitrageur, to spot the seven differences between these two markets. Following that, we take you on a tour of how the arbitrageur acts in the marketplace on a daily basis. Answers on page 41. 38. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009.

(41) 39. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. innovation.

(42) Working in arbitrage is a bit like growing fresh products in that both activities require a wide range of knowledge and skills. Arbitrage requires the common sense of the farmer as much as the sophisticated knowledge of the scientist.. T. scientifically substantiated, objective and realistic. And of course, because financial conditions, like climate change, are constantly evolving and increasingly less predictable, the arbitrageur must be ready and willing to question conventional wisdom and constantly develop both the quality and shelf life of his products.. he arbitrageur works his markets in tune with the seasons, developing new product varieties, looking at the horizon to seed at the right time, protecting his crops from stormy conditions, eliminating the weeds which threaten crops and carefully scrutinizing new market opportunities. Like a reliable farmer, the arbitrageur bases his action on hard facts, on real market data and on the potential of a well-defined environment. Everything that the arbitrageur does must be. 40. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Annual REPORT Dec. 31, 2009.

(43) innovation. ABC arbitrage has implemented a global, industrialized approach to arbitrage. Internally, the group controls every stage of the arbitrage production process, rolled out through a series of refined procedures, from conception to production, with quality assurance from start to finish. This approach ensures that added value is maintained rigorously, through industrial methods. And, like any industrial process, the company’s competitive advantage is built on its lead acquired through R&D and innovation.. The scope of research is infinite because markets are constantly evolving and because the available toolset is constantly being developed, thereby opening new uncharted areas of exploration.. New areas of applications The primary area of ABC arbitrage’s research is what we would call cloning, which means systematically replicating and extending our proven practices to new areas of applications. For example, this might mean expanding geographically to new stock markets or applying the techniques to new asset classes. The second area of research and development involves sourcing and creating new arbitrage models which will increase the range of strategies. This involves elaborate testing, reality checks and validation processes, specific to our way of operating. The possibilities in this area are considerable. Answers to the game on pages 38 and 39. 41. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Fields of innovation.

(44) Annual REPORT Dec. 31, 2009. The arbitrage added-value chain. This determination to protect arbitrage know-how is essential for maintaining efficiency and high levels of performance. Unveiling new development strategies as they are being tested would amount to publicly revealing potential market opportunities and would therefore mean sharing the benefits.. rent strategies. Confidentiality is therefore essential. Furthermore, it often takes several months to refine and test the methodology of a new and innovative arbitrage strategy. In any case, discretion and confidentiality are the hallmarks of all competitive businesses in cuttingedge industries. The pharmaceutical industry is very quiet about its research pipeline, the IT industry hides its trade secrets in inaccessible codes to avoid getting “ripped off“ and the automobile industry competes on both its technical and creative capacities. Arbitrage is no exception to this rule. After all, an agronomist having developed a new hybrid plant species after years of work would not unveil the fruit of his research to all newcomers. In the same spirit, arbitrage also has the right to cultivate its secret garden.. The fact is that arbitrageurs can generate higher returns when they work on exclusive “anomalies“ before competitive pressure reduces margins. There are also strategic reasons for maintaining a high degree of strategic discretion, since sending out signals to the market could erode the profitability of cur-. 42. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Cultivating a private garden.

(45) innovation. The arbitrage business, with its specific requirements, calls upon a great diversity of complementary skills. Successful operations require in-depth knowledge of available data, efficient information systems and mathematical models, as well as comprehension of legal issues, settlement and delivery channels, state-of-the-art order routing systems and transaction financing.. The virtuous circle of quality arbitration: sourcing new opportunities, designing the modeling tools to test their potential, developing new processes and applying the results industrially and then starting again by enhancing core capabilities through research and innovation.. The business demands high performance in a number of areas, including the ability to closely coordinate multidisciplinary teams and to stimulate innovation. This makes arbitrage a high added-value business, distinct from traditional activities in the world of finance.. ABC arbitrage: an industrial approach. 43. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Diversity and the discovery of new products. Systematic management: the four seasons of the arbitrageur.

(46) ABC arbitrage. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Puzzling or pleasing?.

(47) Putting on the right gear to gear things right. E. very undertaking inevitably generates risk. This is true in gambling, on the road, in industry or in finance. What is essential is to be able to assess and control risk. Otherwise, one runs the risk of depending on random luck, which can end up being very dangerous. The challenge is to successfully combine the degree of risk to the efficiency of action, thus generating high levels of profitability. To do this, the arbitrageur has to put on the right “gear“ to gear things right, in order to avoid risks and, whenever needed, to intervene efficiently to limit any “damage“. 45. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. RisK.

(48) Annual REPORT Dec. 31, 2009. Risk attitude… “Wear with all“ to have the wherewithal. In 2008, faced with unprecedented market turmoil, the group clearly demonstrated that its models were well adapted to even the most extreme scenarios. It managed to maintain a low and constant level of operational incidents during the year, despite the disturbed state of the markets and a significant rise in the volume of transactions. Having drawn the lessons of this exceptional period, the group maintained and reinforced its commitment to assess and manage risk in the best possible way in 2009. It continued to implement its internal system of rigorous processes and control mechanisms, based on the separation of functions and the constant monitoring of any irregularities.. From a technical standpoint, ABC arbitrage maintained a close watch on the relevance of its mathematical models to deal with changing market conditions. In this regard, the company often decides to relinquish taking certain positions when there is too great a gap between market reality and internal models. This cautious approach is a fundamental principle to ensure the long-term health of the company. ABC arbitrage also ensures that it always has sufficient cash reserves available to deal with particularly difficult market conditions and, in this regard, did not experience any financing or credit difficulties in 2009.. 46. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. ABC arbitrage has identified several categories of risk to which the company and its clients are potentially exposed. To avoid that risks turn into uncontrollable dangers, the company has instituted internal rules and control systems to reduce risk to a minimum..

(49) RisK. 47. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Cut out the character and dress him up with the clothes of your choice on the following pages..

(50) WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. ANNUAL REPORT 2009-2010 Risque.

(51) RisK. 49. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Cut out the character and dress her up with the clothes of your choice on the following pages..


(53) RisK. 51. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. He is there to cure, but he prefers prevention. He dislikes negligence and contagion..


(55) RisK. 53. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. He makes sure that everything flows smoothly. He hates when things block up or leak..


(57) RisK. 55. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. He makes sure rules are respected. He does not like bad intentions and bad influences..


(59) He is ready to come to the rescue at all times. He does not like people who play with fire.. 57. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. RisK.


(61) RisK. Risks generated by the arbitrage business. M. arket risk is a broad area covering all risks involved in holding positions, including the risk of fluctuations in share prices, exchange rates or interest rates, the risk of using leveraging instruments and, for arbitrages with market risk, the risk that certain expected events fail to occur.. ABC arbitrage does not take directional positions in the financial markets. Its risk is therefore not directly linked to potential downward movements in the markets, but hinges on whether or not an adverse event will occur that may directly affect the arbitrage. Arbitrage-related risks of this type are not intrinsically interdependent. The company calculates the overall risk in its portfolio using a variety of methods. This risk is minimized, either through direct hedging or pooling, which means spreading risk across the greatest possible number of transactions worldwide. Furthermore, the group reiterates that it has never had any exposure to the subprime mortgage market or to any directly correlated derivatives.. 59. Counterparty risk: cover yourself properly This is essentially the risk that counterparties, when financial conditions deteriorate, may be unable to meet a contractual commitment to pay a given amount of money or deliver a specified quantity of securities to the company. For these operations, ABC arbitrage has Choosing the diversified its right partners banking relais the key tionships and to a lasting works exclusively as a client relationship“ of the world’s leading international credit institutions. These companies are all subjected to specific solvency regulations and are controlled by the financial authorities in their home country.. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Market risk: avoid being overexposed.

(62) Annual REPORT Dec. 31, 2009. Liquidity risk: make sure there is enough liquid in the pipes This is essentially the risk that the company may not be able to activate its financial resources quickly enough to meet repayments when they fall due. ABC arbitrage’s assets are exclusively based on listed securities on regulated markets, with the appropriate level of liquidity for each type of arbitrage. Liabilities mainly comprise debt owed to banks or investment companies and are secured by the group’s assets.. Operational risk: detecting viruses to avoid contagion This is essentially the risk of internal failures within ABC arbitrage Asset Management. These failures are unintentional and are due to a material or human problem. The decisions to take certain positions are controlled by strict written procedures and tight internal controls. ABC arbitrage Asset Management has established several levels of independent control to avoid operational errors, including information system refusals, authentication of counterparties and financial intermediaries and verification of position valuations.. 04. Conflict of interest risk: judging the danger ABC arbitrage Asset Management does not issue structured financial products and does not provide M&A advisory services to listed companies. It does not, therefore, come into possession of potentially inside information. Furthermore, the use of a distinct structure for investment funds ensures that all company clients are treated equitably.. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Asset management risks.

(63) RisK. Preventive measures: prevention is better than cure ABC arbitrage Asset Management has established a risk management policy based on formal processes to ensure that it complies with the objectives inherent in third party asset management.. Investment rules are defined jointly by the asset manager and the client at the start of any contractual relationship to ensure that all parties follow the same management guidelines, in terms of investment limits, leveraging, etc. Regular controls are carried out to ensure the relevance of defined limits.. ABC arbitrage has established clear organizational responsibilities by function and reporting lines, which are known to all people in the company and which guarantee the independence of every staff member.. • A customized information system. • Dedicated control resources. ABC arbitrage’s information system is the cornerstone of the organization. Designed and maintained in-house, it is tailored to the specifics of the company’s business. It carries out automatic controls and produces reports on a daily basis. All arbitrage production and trading processes are recorded and archived in the system to ensure full traceability of all transactions.. The company has two dedicated control departments. On one hand, the fully-independent “Market risk“ department monitors positions and ensures that investment rules are strictly applied. On the other hand, the “Finance/Internal control“ department, managed by the Compliance and Internal Control Officer, works according to AMF regulations to draft and update documentation which defines the resources needed to ensure proper operating practices and the consistency and effectiveness of internal controls. These departments organize and participate in both ongoing and periodic controls to ensure compliance and application of proper business practices.. • A well-defined organizational structure. To avoid collusion or unintentional errors, key operational functions are clearly separated, including approval, processing, recording and accounting. For even greater security, the company has developed a series of clear procedures for managing the company’s asset management business, identifying operational functions and enabling knowledge sharing.. 61. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. • Working toward a common goal. • Accountability and empowerment.

(64) K E. 62. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. annual REPORT Dec. 31, 2009. Y.

(65) Key words. W D S. L. ines of development, cross-fertilization of skills, deciphering data, interconnected concepts, innovation schemes… What if arbitrage in fact was just a vast crossword (and numbers) game?. 63. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. O R.

(66) annual REPORT Dec. 31, 2009. Fill in the grid and discover some of the key words at the heart of ABC arbitrage, to understand the synergies of a tight-knit organization.. 2. 3. 4. 5. 6. 7. 8. 9. 10 11. 12. 13. 14. 15. 16. 64. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. 1.

(67) Key words. DEfinitions DOWN Expanding to new markets We only work with this type of product Business booster Operators and controllers do not mix Groups of individuals focusing on a joint goal Our operating process What shareholders and staff share when the company is earning money 14. Our most important resource. across ABC’s business philosophy Our results have always been… Our governance policy Rates that can influence the markets What we look for all the time We like people who have skills and… The key to the future We always comply to these. 1. GEOGRAPHY 2. LISTED 3. VOLATILITY 4. SEPARATION. DOWN. 7. TEAMS 10. INDUSTRIAL 12. PROFITS 14. HUMAN. 5. ETHICAL 6. POSITIVE 8. TRANSPARENT 9. INTEREST. ACROSS. Answers:. 5. 6. 8. 9. 11. 13. 15. 16.. 65. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. 1. 2. 3. 4. 7. 10. 12.. 11. OPPORTUNITIES 13. TALENT 15. INNOVATION 16. REGULATIONS.

(68) annual REPORT Dec. 31, 2009. cross-corporate competencies ince its foundation, ABC arbitrage has consistently demonstrated the relevance and efficiency of its operating model, countering the power of large financial institutions by the simple application of its fundamental principles on a single business. These include carefully tested business practices, a systematic and industrial analysis of processes, constant innovation and creative initiatives, customized and updated production tools, systematic rethinking of operating guidelines, realistic risk assessment and a flexible and dynamic structure that fosters responsiveness. Taken together, these principles could very well form the basis of a sustainable development program for the financial industry: focus on long-term growth, application of scientific rules, adaptation to changing environmental conditions, ethical and transparent business practices, etc.. p G E OG R A p H Y O 1 D Capitalizing on market opportunities U c O p T I M I Z A T I O N S. 66. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. S.

(69) Key words. Technical and strategic development. Understanding the hidden meaning A. BC arbitrage is constantly exploring new areas of improvement and development. In a changing and unpredictable environment, it is essential to prepare the groundwork to avoid being taken by surprise. The group has demonstrated its capacity to do just that since 1995. ABC arbitrage’s philosophy is clear: always have the resources to benefit from unforeseen market behavior and never be subjected to its vagaries. Its upstream preparation process focuses on two complementary factors. First, the group is constantly on the outlook to identify and take advantage of changing market opportunities: geographical expansion, product diversification and optimal operational practices. Second, inside the company, teams develop innovative techniques, transform these into applicable industrialized tools and, ultimately, identify high-potential strategic opportunities.. 67. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. 2.

(70) annual REPORT Dec. 31, 2009. The financial environment has been subjected over the last 15 years to unprecedented changes and extreme pressures. Financial markets are constantly producing unexpected events, sometimes euphoric, sometimes listless and sometimes depressive. Whatever the conditions, the ABC arbitrage group has always managed to produce positive results, thus confirming the relevance of its model and the company founders’ belief in a “pragmatic and scientific“ approach to financial dealings.. A. BC arbitrage has demonstrated that it is possible for an independent investor, exclusively focused on arbitrage, to be a serious market player and to produce regular profits largely above benchmark levels.. While some market operators dread turbulent times, ABC arbitrage has shown it has the talent and the skills to benefit from unsettled market conditions. Its main strength is its fine-tuned financial engineering system and its balanced diversification in various arbitrage types and geographical areas. This is combined with its highly-industrialized processes, its creative and innovative mindset, its ability to adapt to all market conditions, its strict risk management policies and its customized IT tools. ABC arbitrage has thus identified four typical scenarios for market conditions. These are expressed by four basic configurations, symbolically represented by four letters which graphically express market conditions.. 68. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Deciphering complex reality.

(71) Key words. V type markets. W type markets. • Strong volatility • Significant increase in volume • Increase in operations. characteristically have the following traits:. This scenario is the most favorable for the arbitrage business (with or without market risks) because it generates numerous opportunities in volatile conditions.. • Strong volatility • Significant volume • Stable number of operations This scenario is very favorable for the arbitrage without market risks, but less favorable for M&A transactions because the high degree of unpredictability and extreme volatility make it more difficult to make issuance offers.. 69. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. characteristically have the following traits:.

(72) annual REPORT Dec. 31, 2009. U type markets L type markets. characteristically have the following traits:. • Strong volatility • Significant volume • Temporary decline in operations. • Drop in volatility • Decreased third party asset management gathering • Temporary decline in operations. This scenario is relatively favorable for the business because it includes lulls in issuing operations, but in a relatively volatile environment. There is usually some sort of upswing six months later, thus generating new opportunities. As in scenario L, the group compensates by expanding to new territories and testing new products.. This scenario is quite favorable at first because the sharp drop in stock prices presents some opportunities, but is less favorable during the flat period (the bottom of the L). Nevertheless, this second phase generally does not last very long. It is a period for consolidating innovations, allowing time to test and deploy the group’s resources to new geographical areas and to try out new products. 70. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. characteristically have the following traits:.

(73) Key words. Cross fertilization: performance and ethics. An incentive-driven compensation scheme, encouraging medium-term objectives: • Controllers’ bonuses and profit sharing schemes are not determined by the Business Units, but by executive management; • Bonuses are staggered and full bonuses are not delivered until accounts have been audited and profits have been verified; • People in key positions benefit from equity-based medium and long term bonus schemes, based on group profits and weighted in favor of investment opportunities (granting of shares and stock options rather than annual cash bonuses).. A human organization focused on its core business: • ABC arbitrage is a people-sized organization, with less than 75 employees; • The extent of position-taking is known, controlled and consistent with potential commitments; • ABC arbitrage is involved exclusively in the arbitrage business, in which it has developed exceptional expertise. Controlled and secured operating policies: • ABC arbitrage only trades in listed products; • Market access security techniques do not allow any one individual to go beyond certain limits; • The “four eyes“ control policy means that traders are all part of a team and are never alone in making decisions.. Through its action and its success, ABC arbitrage has contributed to the recognition and enhancement of the arbitrage business in France.. Transparent governance and strict internal controls: • Separation of duties – it is impossible for a one person to follow all stages of a single transaction. All departments are involved, including the decision support departments; • Numerous cross-functional reports are produced, immediately revealing any inconsistency; • Reconciliations are carried out daily with financial partners; • Ratios are monitored and analyzed on a daily basis and several times a day during hectic periods.. More than ever, ABC arbitrage teams are ready to continue developing the company and to undertake new and ambitious projects, to generate profits as they have always done in the past. They also believe that they can achieve sustainable growth by remaining realistic, determined and humble, which will enable them to establish the group as an exemplary leader in the field of alternative investment.. 71. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Beyond its refined and time-tested risk management policies, ABC arbitrage is organized to adapt to changing conditions to ensure its long-term development, without ever abandoning its fundamental values..

(74) ABC arbitrage. 04. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. Lose your time or take your time?.

(75) Guess “who does what“ in this ABC arbitrage “Who’s Who“. The governance of ABC arbitrage is based on balance, i.e. on the simultaneous deployment of factors that at first sight appear somewhat paradoxical or even contradictory. For example, the group is very formal about its processes, but very laid back in terms of its hierarchical relations. Also, while control and auditing are based on a strict separation of functions, the group encourages constant dialogue between people with different skills. This balance can also be found in the personalities of the members of the Board of Directors and among the Partners of ABC arbitrage, with each person cultivating a private garden of sorts, often far removed from their busy professional lives. In most cases, contemplative or at least relaxing activities are the rule, but almost always the “simple pleasures“ of life are an essential part of their quest for personal fulfillment. We invite you to guess who does what in their personal lives and to discover the professional profiles of the men who run this extraordinary company. 73. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. governance.

(76) The structure of ABC arbitrage: the balance of individuals working together Governance includes several complementary facets, from the structure of the company to its social and societal responsibilities, via professional practices and corporate values. At ABC arbitrage, governance is above all based on a balance between strategy, operations and control and between individual contributions and collective determination, as well as between formal processes and informal relations.. 74. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. annual REPORT Dec. 31, 2009.

(77) governance. The ABC arbitrage Board of Directors: scrutinizing management ABC arbitrage and ABC arbitrage Asset Management are both French Sociétés Anonymes with a Board of Directors. The Board of Directors is a collective decision-making body, determining the business strategy and general policy of the company and the group. It controls and oversees the group’s management policies and reports to shareholders. It approves the resources required to achieve the strategic objectives it sets. It oversees implementation of the group’s management and control program and reports to the shareholders. The Board of Directors of ABC arbitrage has four members, all appointed for a period of six years. Two non-voting directors also take part in Board meetings and some Committee meetings to provide additional expertise and input.. The governance of ABC arbitrage is based on balance, i.e. on the simultaneous deployment of factors that at first sight appear somewhat paradoxical or even contradictory. Its “Partners“ structure is a perfect illustration of this. This informal forum, without any legal status, is the source of many of the key strategic decisions of a group that implements very formal and strict control processes in its governance policy. By definition, one can only be a founder when a company is first created, but then certain committed individuals are capable of thinking and acting in this spirit. Thus, the Partners project emerged as a natural outgrowth of the company’s activities. There are currently four Partners: the two founders and two senior managers who joined the group at a later date, bringing their skills and ideas to share in a vision of building a world-class player in the arbitrage business, in qualitative terms. To this end, members participate in several work sessions over the course of the year to discuss ongoing projects and the group’s future. In 2006, ABC arbitrage launched an ambitious equity-sharing program, impacting about one third of its staff. On the basis of performance requirements, the Horizon 2010 program enabled a long-term convergence of interests between staff and shareholders, empowering each individual to participate in the group’s growth project. In 2009, a year ahead of schedule, Horizon 2010 achieved its main goal, generating €100m in accumulated profits in five years. ABC arbitrage’s next development project, Horizon 2015 is targeting accumulated profits of €250m over the next five years. Whatever the figures, the main goal of this program, as was the case for its predecessor, is to give people the opportunity to participate in their own way in this collective momentum. This plan is not only financial, in that it is designed to achieve a wide range of personal and group ambitions, including the integration of a “new“ generation of young people in the future of the group, with some of them being called to become future Partners.. Complementary individuals fostering collective cohesion“. Related party agreements: There were no related party agreements in 2009 governed by article L.225-38 of French Code de Commerce.. 75. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. The ABC arbitrage forum of Partners: looking to new horizons.

(78) annual REPORT Dec. 31, 2009. Have fun trying to link the personal interests of the people involved in the group’s governance.. He loves both surf and turf, from sailing the wide blue sea to grooming his very green lawn in Burgundy. He is an amateur of the great. He likes to help companies and airplanes get off the ground and reach cruising speed.. 76. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. classics, from symphonic music to vintage wine, via great cuisine and gardening.. He is very open-minded. He is just as happy with a good home-made stew as he is with a Michelin star meal; he enjoys a simple wine with as much gusto as a great vintage..

(79) governance. He loves water when body boarding, sailing or swimming, but can not stand the sand and the ponds when he is holding a club.. 77. He loves the spirit of the opera, from Wagner to Offenbach and the spirit of places where man and nature meet. In short, he enjoys life.. Réponses page suivante. WorldReginfo - 7a3ec613-37f3-43f3-84e0-389ca3e37718. He appreciates a good crime novel or comic strip book and also has a passion for period properties and rugby.. He likes his aquarium and reads books on management and the markets even when he is on holidays (reality is often more intriguing than fiction)..