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The More Things Change, The More They Stand Out
 |  DIANA CHAN: Shaking Things Up, In European Clearing |  CHRIS REMONDI: Increasing Information, Reducing Risk |  NEERAJ SAHAI: Marrying Large-Scale Technology With Boutique Service |  KEVIN MILNE: Making an Exchange Succeed By Working With Rivals |  THOMAS ZEEB: Gold Standard in Securities Processing |  CHRISTOPHER JAYNES: Cutting Out the Custodian Bank |  PATRICK COLLE: Going Global, But Not Everywhere |  TONY FREEMAN: Targeting Two-Day Settlement

CHRISTOPHER JAYNES: Cutting Out the Custodian Bank

December 20, 2011
By Chris Kentouris

In 2006, private equity firm TA Associates and management bought the company from Old Mutual. By that point, eSecLending had already passed $200 billion in lendable assets and would pass the $400 billion mark the following year. As of today, it has auctioned more than $2 trillion of assets for 20 institutional investor clients. In addition to CalPERS, they include the Ohio Public Employees Retirement System, SEI Investments and Schroders Investment Management.

The reason for eSecLending’s durability goes far beyond the good fortune of having parents with deep pockets. eSecLending has made the auction-based model a viable alternative to the traditional custodian bank route to market.

The credit crisis has also helped boost the merits of eSecLending’s approach. Plan sponsors which suffered major financial losses in the cash collateral reinvestment pools during the crisis are becoming more focused on generating returns from lending the securities rather than just the reinvestment of cash collateral. With that, they are increasingly searching for separate, best-in-class providers for custody, securities lending and cash collateral management services, says Jaynes.

Custodian banks are no longer the ustodian banks are no longer the only option. Third-party lending agents such as eSecLending can enter the fray. Here is how its auction-based model works: the owner of the assets or plan sponsor agrees that eSecLending can post the book of assets it wants to lend on a secure website. An approved list of borrowers will be able to participate in the auction and each one will state the amount they wish to pay to borrow a certain segment of that client’s securities. None of the would-be borrowers know the identities of the others.

At the end of a designated period – typically a few hours – eSecLending will collect all of the proposed bids. It will then present them to the beneficial owner, which makes the ultimate decision. That decision will be based not only on the price that is offered but also the plan sponsor’s exposure to a particular dealer and its creditworthiness. Because of the blind nature of the auction process, if a borrower really wants to gain exclusive access to a segment of assets, they are often willing to offer a significant premium for that access.

A U.S. small cap portfolio could garner a bid of 30 basis points. With that bid, the borrower must pay that amount which gives it exclusive access to borrow those assets at any time during an agreed upon term. Within that term, the beneficial owner retains the right to recall securities from loan at any time and the borrower is contractually obligated to return the securities within the standard settlement cycle.