Program Administration
As a full-service
provider, eSecLending
handles every step of the
process to provide efficient
administration for your
securities lending program.
We manage the
administration and
operations of our client’s
program with
state-of-the-art technology
and thorough risk controls.
The following provide an
overview of our
program administration
capabilities:
With operations groups in
Boston and London, we manage
all ongoing daily operations
and administration for our
clients. Our services include the
following:
- Implementation
and transition management
between all parties
- Implement communication
links with borrowers,
custodians and investment
managers
- Finalize all legal
agreements, procedural
documents and operational
protocols
- Implement and manage
collateral management
program
- Perform daily
operational tasks
including:
Marks to market •
Loan processing • Loan
recalls • Reconciliation
with borrowers and
custodian • Corporate
action monitoring and
processing • Substitute
income tracking and
processing • Tracking,
movement and investment of
collateral • Communication
with cash reinvestment
manager • Ongoing credit
monitoring of approved
borrowers • Compliance
monitoring •
Calculate guaranteed
exclusive fees
- Extensive risk
management oversight
- Performance analytics
and attribution
- Dynamic ongoing program
review and consultation
- Indemnification against
borrower default
- Consolidated online
reporting across all
providers, including
earnings and risk
management reports
- Dedicated client
service team with the
option of an in-house
client service
representative when
applicable
- Assistance with
internal program education
and knowledge transfer
eSecLending utilizes
state-of-the-art diagnostic
tools and methods to help
assess risks for our
clients’ entire securities
lending programs. When
properly planned and
executed, securities lending
is a low-risk investment
strategy to enhance
portfolio returns.
There are four
general risks in securities
lending which are
systematically addressed by eSecLending’s risk
management team in
conjunction with the Legal
and Operations departments.
The four main risks and
their controls are listed
below:
For clients, our
integrated approach using
Value at Risk
(VaR) methodologies and
counterparty credit analyses
provides a unique view to
monitor risks across an
entire lending and
reinvestment program.
Control activities
throughout eSecLending help
verify that management’s and
clients’ directives are
carried out and identified
risks are properly
communicated, managed and
monitored. Risk oversight
and approvals are the
responsibility of the
Securities Lending
Committee, whose main
functions are to approve
credit lines and investment
guidelines, make
recommendations with respect
to compliance and procedures
in all areas, monitor
borrowing and re-investment
risks and approve all new
lenders, borrowers,
procedures and products. In
addition to its proactive
risk management and
oversight, eSecLending
offers lenders
indemnification insurance
against borrower default.
Lenders participating in the
program are indemnified from
losses due to failed returns
of loaned securities as a
result of the borrower’s
bankruptcy, insolvency
proceedings, or causes
related to acts of
bankruptcy.
eSecLending provides clients
with earnings and risk
management reports which
consolidate the lender’s
positions and results across
all lending programs in a
standard format, including
programs not managed by
eSecLending.
Consistent with eSecLending’s philosophy of
client empowerment, lenders
are able to customize their
reports, available online
and in print, to suit
preferences. eSecLending
utilizes a secure reporting
database to ensure that all
aspects of client reporting
are kept confidential.
The database includes, but is not
limited to, market values of lendable assets, rebate
rates, collateral balances,
custody fees, collateral
reinvestment yields and
relevant auction
information.
Securities Finance Trust
Company employs a “top-down”
approach to investing
securities lending cash
collateral. We commence with
regular meetings of our
Investment Sub-Committee,
composed of senior members
of the firm, plus
representatives from our
Credit and Cash Management
team. Day-to-day investments
are determined based on a)
the underlying guidelines
approved by the client, b) daily cash
flows arising from loan
activity and c) market
opportunities. We have a
core team of cash experts
who manage client portfolios, monitor
and reconcile all activity,
and control and sign off on
all activity at end of each day.
Our philosophy for managing
a securities lending cash
collateral portfolio
encompasses elements of both
the “liquidity” portion of a
collateral pool and the
“core” portion. We
constantly monitor the four
major areas of risk involved
in the reinvestment of cash
collateral: liquidity risk,
credit risk, counterparty
risk and interest rate risk.
These can be addressed by
creating portfolios that
have below-market risk,
which still achieves market
returns.
When implementing a cash
management strategy to
support securities lending
activities, it is necessary
to maintain a comfortable
level of liquidity to allow
for the daily movements of
cash and securities that are
fundamental to every
securities lending program.
This level varies, depending
on the volatility and
seasonality of the portfolio
on loan. This "liquidity"
portion of the cash pool is
invested in overnight and
other short-dated
instruments, allowing the
cash manager to meet the
daily liquidity needs of all
operational activities such
as returned loans, marks to
market, or corporate action
outflows.
The remaining balance of the cash
collateral generated from
lending would then be
considered “core” or
“stable” cash. The
investment philosophy for
this portion of the cash
collateral pool is geared
towards generating higher
returns. This core cash may,
for instance, be invested in
slightly longer-dated or
less liquid securities,
while still operating under
the approved investment
guidelines for the program.
This portion of the cash
pool is expected to be more
stable and not be subject to
the daily fluctuations
generated by normal lending
activity.
This “liquidity” versus
“core” concept is considered
a practical division of the
reinvestment process that
allows for flexibility and
control, while maintaining a
high level of responsiveness
to daily trade flows. Since,
in the normal course of
securities lending, cash
balances will increase and
decrease constantly over the
course of the day, a ready
pool of cash needs to remain
available to meet demands.
Late day investing of unused
cash falls to the liquidity
cash manager once all
deliveries are
sent/received.
Bundled vs. Unbundled
Cash Management
Managing the pool of cash
collateral generated by
securities lending
activities may be bundled
together with the lending
agent, or, in some cases,
different managers may be
awarded the two different
components of the cash
collateral pool. Some large
lenders have different
investment guidelines and
benchmarks for managers
investing core cash than for
managers overseeing
liquidity cash. Our process
is flexible and can
accommodate all structures.
Managing the Liquidity
Portion of a Cash Collateral
Portfolio
Regardless of whether or
not the cash pool is managed
separately, or is bundled
together under the mandate
awarded to the lending
agent, the manager of the
liquidity portion of a
securities lending cash
collateral portfolio must be
responsive enough to deal
with the constant inflows
and outflows of cash over
the course of a trading day.
This is greatly enhanced if
the lending agent is also
the manager of the
“liquidity” pool of cash
because of the need for
timely communication between
the lending group and the
cash manager.
Ideally, the cash manager
of the “liquidity” pool is
separate from, yet in close
proximity to, those
individuals processing the
daily loan activity. This
fosters a constant
interaction and ongoing
communication between the
operations team (in charge
of instructing the movement
of securities into and out
of the lender’s account),
and the cash manager,
which is critical to
maintaining the appropriate
level of liquidity and
return in the portfolio.
Since cash balances vary as
new loans go out and other
loans are returned, and as the
daily mark to market of the
loan portfolio creates
inflows and outflows of
cash, the cash manager
must be near enough to the
source of these cash
movements to respond
immediately to calls for
cash drawdowns.
Managing the Core Portion
of a Cash Collateral
Portfolio
Core cash components,
with less demand for
liquidity, should be
expected to return more over
time than the liquidity
portion. This is not merely
due to the historical higher
returns of extending out the
yield curve, but also from
the ability to employ
investment tools that are
not appropriate for a
“liquidity” component:
duration risk, liquidity
risk, complexity risk. One
risk that should not be
greater in the core cash
portfolio is credit risk,
however, especially if
managed at a longer average
life. “Core” and “liquidity”
portfolios can successfully
be separated with different
managers. For compliance and
risk management purposes, however, we
suggest that taken as a
whole, their combined
attributes stay consistent
with investment policies in
place for the clients other cash holdings.
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