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20-20: The new world order in securities lending

20-20: The new world order in securities lending

Thursday, 15 December 2011
20-20: The new world order in securities lendingDuring a FTSE Global Markets interview at the end of 2010, Brian Lamb, chief executive officer of New York-based EquiLend, a provider of trading and operations services for the securities finance industry, suggested that the most successful beneficial owners are the ones that consistently allocate resources and apply professional investment-management processes and approaches to their programmes—because, said Lamb, “as history has often shown, one can’t afford not to be educated”.http://www.ftseglobalmarkets.com/media/k2/items/cache/9d8de7ef67b13c9c52fcfb74767a1564_XL.jpg

During a FTSE Global Markets interview at the end of 2010, Brian Lamb, chief executive officer of New York-based EquiLend, a provider of trading and operations services for the securities finance industry, suggested that the most successful beneficial owners are the ones that consistently allocate resources and apply professional investment-management processes and approaches to their programmes—because, said Lamb, “as history has often shown, one can’t afford not to be educated”.

For the better of the past decade, securities lending was a perpetual wellspring of revenue for beneficial owners and, not surprisingly, a sense of complacency ultimately took hold. Then came the fall of 2008 (literally), and owners quickly assumed a defensive posture, some exiting sec-lending altogether, others finding few plausible alternatives and ultimately returning, albeit with a renewed sense of urgency and a need for full transparency.

While the market psyche may have changed for good, EquiLend is seemingly none the worse for wear. It is ten years since its incorporation (the platform went live in 2002), and chief executive officer (CEO) Brian Lamb has watched EquiLend’s business grow out from an initial ten-member ownership group to a roster comprising 70 or so different global financial organisations. It has obviously been a source of satisfaction for Lamb. “It’s certainly a proud moment to reach this milestone and to have things going so well at the same time,” he remarks. “The fact that the business continues to grow at this pace is tremendously important to us, as we see ourselves as a cog in the wheel of the securities-finance business, one that can continually bring more efficiency to the entire marketplace.”

EquiLend’s operational model is such that if there’s big volume, business is good—no matter which way the markets are moving. Not surprisingly, the most recent round of high volatility is reflected in EquiLend’s year-to-date stat sheet; through September 2011, total borrowing and lending transactions were up 16%, and in 2011 the platform experienced its ten largest trading days ever, including 28,000 transactions processed during a single day in August 2011. Volume has only been part of the story. Through 2011 EquiLend added 15 clients, a record for a single year, including newcomers such as Prudential Investment Management, Kellner DiLeo & Co., and RBC Dexia Investor Services. Backing Equilend are some of the world’s top global financial institutions, among them BlackRock, Goldman Sachs, JP Morgan, and Bank of America Merrill Lynch.

Key to EquiLend’s recent spate of success is innovation wherever possible, says Lamb. EquiLend’s post-trade offerings are ripe for investors seeking plausible risk-mitigating strategies. Additionally, a new trading-optimisation programme enables clients to pool long and short assets and includes limits based on existing bilateral relationships. “Our goal is to optimise these securities transactions to the fullest extent,” says Lamb.

While the EquiLend platform has always been able to accommodate fixed-income securities, it wasn’t until recently that investors on the bond side began to truly embrace the EquiLend concept, he adds. The firm launched BondLend, a fixed-income and repo-trading/post-trade services platform designed to boost liquidity and reduce risk using a single point of entry to the non-equities sector. “Of the roughly 20,000 trades that we handle daily, roughly 2,000 come from the fixed-income side,” says Lamb. “We see that number growing pretty significantly over the near term. Let’s face it—the world as a whole has a lot of debt, and is in need of tremendous financing. So in terms of notional size, we’re looking at a market that is much bigger than equities.”

Initially used mainly for general-collateral or “low-touch” type transactions, over time investors have begun to reap the benefits of EquiLend’s automation processes for other kinds of trading. Today, some 20% of platform activity is specialist-based or otherwise non-GC— “which is a pretty significant number, and we expect that trend to continue, particularly as the markets fully embrace automated solutions in order to keep pace,” notes Lamb.

Given the uncertain nature of the financial landscape, Lamb is heartened by beneficial owners’ efforts to stay informed. He observes:  “Events like the demise of MF Global serve as a reminder to all financial institutions that no one can afford to be complacent—you have to be diligent, applying sound financial modelling and market-tested principles in order to run your business successfully. [And] with leveraging down, capital allocation has become paramount, requiring that balance sheets are maintained more efficiently than ever before.”

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