Securities Finance
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Icap's Zimmerhansl: Transparency Is Key to Efficiency
Interdealer brokerage seeks to differentiate itself with electronic trading
August 20, 2007
Once an arcane back-office activity, securities lending is quickly becoming a major front-office function as brokerages, custodian banks and underlying lenders realize the extent of the profit opportunity. However, the rapid growth of the market has resulted in a need to automate what was once an intricate maze of telephone and fax communications.
In April, London-based interdealer brokerage Icap launched an electronic trading platform for securities lending, providing what it says is the first-ever screen-based access to bids and offers. The new system, i-Sec, is based on the BrokerTec system that Icap acquired from an investment bank consortium in 2003 and has been at the core of an e-trading business that now accounts for more than half of the firm's more than $1.5 trillion in average daily transaction volume.
The first and so far most successful attempt at automation in securities lending came six years ago when a group of investment banks collaborated to create EquiLend. However, Icap contends there is room for another electronic platform.
While the other established securities lending systems are based on matching engines, Icap's is an actual trading system; it allows users to boost bids and offers with the goal of negotiating with counterparties if they don't find the price they desire. Whereas hedge funds used to be the main users of securities finance, they now compete with large traditional asset managers, which drives up the cost of loans, particularly for hard-to borrow securities, according to Icap. With 130/30 strategies--those with long positions of 130 percent and offsetting short positions of 30 percent--and portable alpha strategies, traditional asset managers enter the short-selling fray with significant clout.
In February 2006 Icap tapped Roy Zimmerhansl, previously global head of securities lending sales and marketing at Deutsche Bank, to spearhead its push into the electronic securities lending market. Zimmerhansl has been managing director and global head of collateral management at Rabobank and held similar posts at Nomura and the former Chase Manhattan. Senior international editor Chris Kentouris interviewed Zimmerhansl, director of securities lending at Icap, about i-Sec and the future of the industry.
Why did Icap expand into securities lending? We have a strong presence in the fixed-income and repo trading markets with BrokerTec. Our customer base of investment and commercial banks approached us to improve the process for securities lending for equities in the same way we have done for repurchase agreements. We also believe that the securities lending industry is at an important juncture of a growing compression in spreads, which is driving the demand for automation. With i-Sec, we are aiming to help our customers significantly improve efficiency, increase the diversity of their counterparty relationships and distribution, and reduce cost.
What differentiates Icap from competitors in securities lending? I-Sec enables traders active in securities finance to borrow or lend equities via an electronic platform that combines the leading order-matching system with a high-speed, high-capacity and fully redundant communications network. I-Sec offers full anonymity until the time of trade execution, with relationships defined by the user as well as price transparency. We display all bids and offers posted on the system regardless of whether or not counterparties can trade with each other. I-Sec is open to all market participants, with no barriers to entry, and leads to better distribution of securities available for lending held by institutional investors or their agent lenders. It also promotes more cost-effective communications for borrowers who no longer have to rely on the telephone or proprietary links with a multitude of lenders and their agents. With most other securities lending systems, there is no opportunity to negotiate on deals because they are primarily matching engines, but they do have all the post-trade processing functions.
