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Equilend : EquiLend 10th Anniversary
O n a warm early summer evening in 2001, Goldman Sachs hosted a lavish party at the Villa Medici, set high in the hills above Rome. Some of the biggest participants in the $1,000bn global securities lending business were in attendance. Huddled on one of the villa’s many balconies, executives could be overheard speaking about something called Hubco. It has turned out that Hubco was the working name for a company now known as EquiLend, an industry- owned platform for electronic securities lending and borrowing. Since its 2002 launch, EquiLend has grown so explosively that it now facilitates $20bn of securities lending and borrowing trades in a single day. Though little understood, securities lending has become an important tool for large institutional money managers and pension funds to improve returns, and they have a willing borrowing market in the form of investment banks and hedge funds. A measure of the growth is that on a typical day during its first year in operation, EquiLend would process 3,600 transactions, representing securities valued at $2.2bn. Growth has not slackened. Brian Lamb, chief executive of EquiLend, says that since this time last year alone, the client base has increased 70 per cent. “That increase in clients has resulted in daily values of all trades executed through the platform growing 67 per cent since the same period last year,” he says. “In fixed income alone, the numbers have increased 80 per cent.” Talk at the three-day conference, the end of which was marked by the Goldman party, focused on the pressing need for automation of the securities lending and borrowing business (known collectively as securities financing), which had been a slower adopter of technology than many other areas. As a result, a range of software and so-called electronic solutions providers went to Rome in 2001 touting their wares and seeking to make quick money. Senior figures from some of the largest broker dealers and custodian banks in the business decided this was not to be tolerated. Rather than line the pockets of opportunists, they agreed, they needed to club together to form their own electronic platform, having agreed that automation was unavoidable in the long run. That turned into EquiLend, unveiled as an industry-owned platform soon after the conference. It was set up by 10 of the largest companies involved in the securities financing business, lenders and lookinG baCk www.equilend.com 21 Inexorable rise of the EquiLend platform borrowers. They invested $4m for the pleasure of being at the top table. The founding companies were Barclays Global Investors, Bear Stearns, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Northern Trust, State Street and UBS. Credit Suisse and Nomura have since invested. Barclays Capital, ABN Amro, Mellon and Société Générale have come on board as new clients. “There are a number of reasons why a firm would want to use EquiLend,” said Eugene Picone, EquiLend’s chairman and also a senior vice- president at JPMorgan. “From our perspective, we see the value in the overall economies of scale that we have been able to extract from the system. In the past year we have increased balances by more than 100 per cent and enjoyed a 20 per cent improvement in our cost-efficiency ratio.” This year the securities lending conference returned to Rome, with EquiLend’s place at the heart of the securities financing business looking assured. Securities financing plays a vital role. The basic securities lending transaction involves the temporary transfer of a security by its owner to another investor or intermediary. Once the securities have settled, the title and voting rights are transferred to the borrower, who can sell or re-lend the borrowed securities during the life of the loan. The borrower agrees to return the loaned securities, secure the loan with collateral of equal or greater value than the loaned securities, pay user fees, and remit to the lender dividends, coupon interest or other distributions that occur during the time the securities are on loan. Borrowers tend to be investment banks, broker-dealers, intermediaries and, increasingly, hedge funds. Lenders, with equities or fixed income securities available for loan, will commonly participate in one of two ways, either directly or indirectly through an agent. Large institutional investors such as pension plans, insurance and life companies are the most willing to lend. It is a simple and safe way to bolster returns they are generating from assets held for the long term. Many pension funds, particularly in Europe, had resisted securities lending, due primarily to a lack of understanding, but that seems to be changing. The big global custodian banks such as State Street and Northern Trust are now more proactive with their clients’ money and are persuading more to take part. // June 20 2006 Published in the Financial Times. By Anuj Gangahar EL.indb 21 26/08/2011 09:56