Securities Finance
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Auction Model Gains Among Beneficial Owners
ESecLending grows as the securities lending industry shifts into higher gear
August 20, 2007
In what is one of the last areas of pricing opacity in the financial industry, eSec-Lending anticipates significant growth in the volume of securities it lends to borrowers this year. The Boston-based firm's increasing share of the securities lending market is a reflection of its success in establishing a new stock-loan-transaction paradigm.
"We've been growing north of 50 percent annually in terms of lendable assets and assets on loan, and it looks like that will continue this year," said Christopher Jaynes, president of eSecLending, which was started in 2000 under the majority ownership of London's Old Mutual before being bought out in spring 2006 by Boston private equity firm TA Associates.
Securities lending, in which one party loans securities to a short seller who anticipates buying the same securities later at a lower price and pocketing the difference, has grown rapidly in recent years. However, it is mainly a dealer-to-dealer market that still provides little transparency and plenty of opportunity for malfeasance, as shown by recent regulatory actions such as a $2.5 million fine levied by the New York Stock Exchange against Janney Montgomery Scott for short-sale violations.
The industry developed decades ago as a back-office function linked to custody and settlement issues, and as recently as five years ago it was viewed largely as a custody-related operation. Beneficial owners of securities, such as mutual funds and pension funds, came to rely on large custodians such as State Street Corp. and Citigroup to manage their portfolios. The custodians lent the securities to broker-dealer intermediaries, sometimes in long chains that garnered wider and wider spreads before the securities were borrowed by an actual short seller.
Lending Makeover
ESecLending was one of the first firms to change that approach. It seeks direct relationships with beneficial owners who continue to use custodians to house their securities while allowing eSecLending to manage their lending portfolios. Other securities lending businesses have started up in recent years, each seeking to shorten the chain between lenders and borrowers. "No provider can be best at every single asset class," said Jaynes. "If I split the program among different providers, I can introduce competition and find different competency and skill sets, improving risk management, reporting, client services and returns."
Among the new providers are New York-based Quadriserv and Jersey City-headquartered Locatestock.com, which have established broker-dealers to act as transaction intermediaries between borrowers and lenders. Quadriserv, which caters to hedge funds managing at least $500 million in assets, has recently signed agreements with two state pension funds to lend their securities.
Other firms, or units of much larger financial services companies, such as Dresdner Kleinwort, Wachovia Global Securities Lending and Boston Global Advisors, which is owned by Goldman Sachs, have also sought non-custodial relationships with beneficial owners to lend on their behalf.
Beneficial owners appear to strongly support such developments. In its 2007 survey of 202 beneficial owners, London-based International Securities Finance magazine ranked eSecLending first or second in eight of nine categories, including settlement and responsiveness to recalls, risk management, costs and application of technology. Dresdner, Wachovia and Boston Global also featured prominently in the rankings. In 2006, Boston Global ranked first in many of the survey categories and eSecLending was well represented, but the lion's share of top-five positions in each category belonged to traditional custodians such as Bank of New York and Bank of Ireland.
