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2012 Top International Operations Executives

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

Just how much better is eSecLending’s auction-based model? Jaynes says that it typically outperforms traditional pooled approaches used by custodian banks. The improvement varies depending on the assets involved and the parameters of the securities lending program but Jaynes claims that clients can often see returns increase anywhere from 30 percent to 50 percent.

General collateral securities are the most liquid and cheapest to borrow. Specials are far less liquid so they attract a higher price tag when lending. Custodian banks primarily operate a pooled program in which clients with the most attractive supply of assets – the specials-- often subsidize the returns of clients with less attractive lendable assets or the general collateral ones.

“There is a practice inherent in traditional pooled programs whereby in order for a borrower to receive special securities it must commit to borrowing a certain amount in general collateral or less attractive securities,” Jaynes says. “This reduces the returns on specials as borrowers are not always able to offer their best price when required on a quid-pro-quo to also accept assets for which they have little or no demand.”

eSecLending’s clients don’t rely solely on its auction-based system to lend out their securities. They can also do this through exclusive arrangements with borrowers

The firm also offers “discretionary lending,” in which it actively trades the assets on a daily, best-efforts, non-pooled basis. Some of eSecLending’s clients utilize a multi-provider approach where they also hire their custodian bank as agent for certain portfolios. eSecLending depends on firms such as SunGard Data Systems, Pirum and EquiLend for middle- and back-office services including reconciling the books and records between the borrowers and the lending agents.

Jaynes isn’t concerned about the competition and is glad that technological advancements -- and market conditions -- have now leveled the playing field between custodian banks and other third-party lending agents. "We don't expect all plan sponsors will use an auction but most view the process as a relevant and proven alternative to traditional methods of lending," he says.