eSecLending was founded in 2000 as an alternative to traditional custodial and other third-party pooled lending models; created from the perspective of a beneficial owner. From the beginning, we incorporated key investment management principles including best execution philosophies, a multi-manager discipline, price transparency, performance measurement and separately managed accounts; conventions which continue to drive our business today. Every client program is built around the needs of our beneficial owner clients, rather than those of the custodians or borrowers.
Today, our team is one of the strongest in our industry, with experienced professionals that have worked for many of the traditional securities lending bank providers. We maintain the entrepreneurial spirit and principles of the individuals who have been with eSecLending since our inception. These complementary and diverse experiences bring unrivalled perspective, ideas and creativity to each client program.
Securities Lending Philosophy
Our core business is managing securities lending programs for our clients. We believe that to optimize performance program’s needs, we need to evaluate two executions strategies: exclusive lending and discretionary lending. We utilize our proprietary auction process to garner price discovery from the market before making execution decisions. In all cases, we operate segregated, individually managed programs designed around each client’s goals and objectives.
Traditional lending where loans are negotiated daily, based on demand levels in the marketplace, and revenue; fluctuates based upon the prevailing rates for each loan. Revenue is not guaranteed and profitability is driven by the negotiated fee on each individual security.
A borrower commits to pay a guaranteed fee that is applied to the lendable market value on a specific portfolio, or subset thereof. All loans that are executed are done so on an overnight (“on open”) basis. The beneficial owner retains the ability to recall the loan and the portfolio manager has no restrictions on trading that security. The borrower pays an “access fee” for the exclusive right to borrow from the portfolio for a predetermined timeframe, rather than paying for each individual loan. The revenue stream, therefore being guaranteed and predictable, and driven by the exclusive fee, which is accrued daily and paid monthly.
eSecLending’s proprietary auction process is disciplined, transparent and repeatable. We segment a client’s portfolio into auction lots and conduct a competitive bid process whereby approved borrowers submit one-time, blind bids for access to a given portfolio of assets. Our experience suggests that a one-time, blind bid encourages borrowers to pay significant premiums for assets they need the most. We do not give bidders transparency into pricing from other borrowers, nor the option to re-bid.
However, we and our lending clients have full transparency into the bidders and their bids in real time as they are placed into auction platform. The bids placed by borrowers are legally binding on their organization, but represent a free option to our clients to accept or decline the bid.
Through this process we and our clients garner valuable price discovery and transparency that is not available anywhere else in the securities lending marketplace. This unique intelligence helps determine which lending strategy is best suited for a given set of assets. If a compelling guaranteed bid is offered, we will consider an exclusive arrangement. If no compelling bids are offered, we will lend the securities via a discretionary trading strategy.
The auction is a decision-making tool and not an execution strategy with the process transferring power from the borrower to the beneficial owner. We firmly believe market pricing in securities lending remains inefficient, and that our auction helps us and our clients identify outlier bids, enabling our clients to capture premium returns in certain asset classes and markets.
Cash Collateral Management
We treat collateral management as a segregated part of the securities lending function. Our approach is one of open architecture when it comes to who manages cash collateral, and our infrastructure is designed to support different cash collateral managers on a seamless basis. In scenarios where we manage cash collateral, it is always done in separately managed portfolios and we offer an indemnity to clients for investments made in repurchase agreements.
Increasingly, many of our clients are accepting non-cash collateral for all, or a large portion of their securities lending programs. We support this arrangement through segregated tri-party custodian accounts or via a bilateral structure at our client’s custodian. When using the tri-party custodian structure, utilizing segregated accounts in the client’s name is a critical to sound risk management. Many other agents have a commingled account structure at the tri-party custodian, which is suboptimal from a risk and control perspective. When accepting non-cash collateral, we work closely with our clients to draft customized collateral schedules to address the client’s individual approach to liquidity, diversification and required margin across different collateral sets.
In managing segregated, standalone securities lending programs for our clients, eSecLending’s approach to risk management is to tailor all aspects of each program to each client’s unique objectives and risk management parameters and tolerances.
As part of our commitment to transparency, we can provide value-at-risk (VaR) and stress testing for both eSecLending’s program and each clients’ own program, with full transparency into all borrower risk analytics. This enables clients to understand “worst case” scenarios for their exposures utilizing various historical market stress events.
In the event of a counterparty insolvency, eSecLending provides indemnification insurance supported by policies backed by highly rated, independent insurance companies. These insurance firms also provide an independent layer of credit approval and monitoring of the collateral and borrowers within our program.
In addition to our core securities lending and collateral management services, we are also focused on developing new, innovative and complementary products in close coordination with our clients to address a specific need or challenge in their businesses. Some noteworthy examples include:
Peer-to-Peer Transaction Opportunities – as borrower and repo counterparty balance sheet pressures continue to restrict some traditional activity such as repo and general collateral lending, we have increasingly seen beneficial owners stepping up to fill the void and have executed on transactions that have both revenue and risk benefit to clients on both sides of the transactions. Our clients appreciate our willingness to bring them these types of new ideas, as well as our ability to provide the credit, legal and operational infrastructure required to administer peer to peer transactions together with an indemnification wrapper.
Collateral Optimization– helping clients optimize their assets in order to meet the market demands for collateral for derivative transactions; providing holistic solutions as part of an overall securities financing and treasury management strategy.
Securities Lending as Alternative Funding Source– using cash collateral from securities lending as an alternative liquidity source to fund other investment commitments, reducing funding costs, and reducing reinvestment risk for the securities lending cash portfolio.
Self-Financing Strategies for Long/Short Investment Mandates– a self-financing solution to manage a 130/30 long short strategy by using client holdings to help satisfy short sells executed by their investment managers. This strategy brings revenue to the client that was previously paid to external vendors, while also reducing counterparty risk.