Securities Lending Technology
Transparency Taking Hold | EquiLend Rides Growth Curve | Amid Legal Clouds, Automated Solutions | SEC's Short-Sale Guidance May Call for IT Adjustments
EquiLend Rides Growth Curve
July 10, 2006
As in other financial product areas, automation has promoted and supported growth in the $1.5 trillion global securities finance market. At the same time, the market is coming under unprecedented regulatory scrutiny since last year's implementation of the Securities and Exchange Commission's Regulation SHO and the impending Oct. 1 deadline for the final phase of the agency lending disclosure initiative.
One of the technology providers responding to the challenges of automation and compliance is EquiLend Holdings, a consortium formed in 2001 by 11 major firms--Barclays Global Investors, Bear Stearns & Co., Credit Suisse, Goldman Sachs Group, JP Morgan Chase & Co., Lehman Brothers, Merrill Lynch & Co., Morgan Stanley, Northern Trust Corp., State Street Corp. and UBS--to develop and operate a global platform for securities finance transactions. The New York-based company was organized as a broker-dealer in the U.S. and an alternative trading system in Europe, and it entered a technology niche that had largely been dominated by SunGard Data Systems and its Loanet and Martini products.
The regulatory scrutiny is coming partly
because of the close association between securities lending and
short selling by hedge funds. The conventional wisdom is that
regulation is a much-needed corrective to activities that add to
market risk, but that doesn't reflect the reality of securities
finance, in the view of EquiLend CEO Brian Lamb. He says the
business grew out of a need to address failed settlements, which
were a persistent problem as recently as the 1980s. As securities
finance became more widespread, fails became less of a difficulty
and liquidity and efficiency improved for the capital markets as a
whole. Says Lamb: "It's a big story that's often overlooked--the
efficiencies and liquidity that securities lending brings to
bear."
Lamb spent 17 years with Barclays Global Investors before joining EquiLend last year to succeed Dirk Pruis, the platform's head since its inception. (Pruis left to become VP of advancement for Calvin College in Grand Rapids, Mich.) Lamb's last position at the Barclays unit was head of global derivatives services. Before that, he was product manager for fixed-income securities lending. In 2001 and 2002, he and Pruis, who was a VP in the technology strategy department at Goldman Sachs, co-led the project to get EquiLend off the ground. Lamb recently discussed the securities finance market and his company's place in it with Securities Industry News managing editor Joseph Radigan.
What distinguishes securities lending from securities
finance? Securities finance is a broader description of
the business. It encompasses both securities lending and securities
borrowing as well as the other, underlying financial transactions
and financial dynamics that accompany them.
What prompts a market participant to borrow securities? At the most basic level, someone borrows to cover a short position or a fail, which has to do with the delivery of securities. Suppose you call up your broker, and you want to buy some shares of Cisco. If that trade is supposed to settle in three days, but the seller isn't able to deliver those shares, that would be a fail, and the seller would generally look to borrow the securities until the fail is covered. Fails are a big part of the marketplace, and 20 years ago they were a big problem. Securities lending solved that. Without it, you would have a less liquid market with less efficiency that would have higher costs for all investors. Someone would have to pay the price for that inefficiency.
