SLT: Could you explain where eSecLending fits into the securities lending market?
Chris Poikonen: eSecLending is a full-service global securities lending agent providing customised securities lending solutions for institutional investors worldwide. We are the only independent agent in the market and one of the largest third party providers. Our philosophy applies investment management practices to the securities lending industry. Our differentiated process utilises a transparent, disciplined and repeatable auction process to determine our clients’ optimal lending strategy and facilitate best execution. Our performance is driven by innovation and validated by client satisfaction and industry recognition. Our people are committed to delivering thoughtful solutions and developing long standing partnership with clients.
With over ten years of experience we are active in 33 markets and have over 100 employees dedicated to securities lending who are located in our offices in the US, Europe and Asia.
eSecLending pioneered the use of auctions in securities lending. Having auctioned over $2 trillion in assets for beneficial owners since inception, we have more experience than any other provider in the industry in structuring optimal securities lending programmes utilising a disciplined and transparent process. We believe in the auction process. We have spent years perfecting the model and investing the knowledge and capital necessary to improve the process. We put our clients’ interests first and do not try to be all things to all lenders.
SLT: What was the impetus for development of the auction process?
Chris Poikonen: eSecLending was founded in 2000 to provide an alternative approach to securities lending for institutional investors in an effort to address what we saw as the limitations of traditional custodial and other third party pooled lending programmes. Our origins began in the late 1990s as part of an asset management firm where we were looking to establish a securities lending programme for portfolios managed by United Asset Management / Old Mutual. During our review process, we determined that securities lending should be treated as an investment management and trading discipline rather than an operational function.
We observed that many concepts that had been employed for years in the investment management industry were largely absent in the securities lending market. Concepts including best execution, multiple managers, best-in-class specialist providers, competition among managers, performance measurement and benchmarking were not widely incorporated into the securities lending market. As a result, we developed a different approach by developing an auction process to optimise client returns and justify their mandate allocations.
SLT: How does this process address the concerns of beneficial owners?
Chris Poikonen: A disciplined, transparent and repeatable auction process is a powerful tool for optimising your lending programme. Auctions are not a “route to market”, rather they facilitate informed decision making as to whether assets are best suited for exclusives or discretionary lending (As an agent, we are unbiased as to which route the lender takes). The auction allows for full customisation and there are varying structures available that can accommodate common beneficial owner objectives. One misperception in the market is that auctions are complex and require more resources from the beneficial owner however the time and effort required to conduct an auction is not dissimilar from beginning any new lending program.
The industry evolution has made auctions more relevant than ever before and we are seeing increased demand for information. Auctions in the securities lending industry enable beneficial owners to achieve maximum price discovery by capturing the inefficiencies of the lending marketplace for the benefit of the lender. In addition, an auction is well positioned to respond to lenders’ increased focus on optimising intrinsic returns as it secures the premium returns that borrowers are willing to pay for exclusive access to the lending value of attractive supply. Based on the results of an auction and in conjunction with the guidance of an agent, lenders can make informed lending decisions/allocations based on actual market data.
SLT: How does the auction process work?
Chris Poikonen: While the process is quite simple, it is important to note that not all agent auctions are the same; look for a disciplined and repeatable process. In eSecLending’s model, we typically auction assets first to determine the optimal route to market (ie, agency exclusive or discretionary) on each portfolio or subset of portfolios. In both programmes, our philosophy is to allocate to the best bidder given each client’s guidelines and risk parameters. Our auction model enables clients to benchmark their returns and measure their performance against the market for their given assets, parameters, guidelines and risk tolerances. Using a market based approach is truly unique in the securities lending industry and we are the only lending agent that uses the auction as a means to assess demand before allocating assets to agency exclusive or traditional agency routes to market.
Many of our clients use our auction as an annual optimisation tool to allocate between our programme and potentially other relationships if deemed advantageous to them. Some view our process as a form of an “annual RFP” that provides the proof to boards, management and auditors that the firm is achieving best execution for their beneficiaries.
SLT: How was your presentation received at the IMN European Beneficial Owners conference in September? What were some of the issues raised?
Chris Poikonen: The workshop was well attended by a diversified set of beneficial owners of all sizes. People were most interested in learning about the “auction process” and how it can be utilised for both outperformance and risk mitigation. The majority of attendees want their securities lending programme to be a customised offering built around their unique requirements. An off the shelf securities lending product designed for the masses is no longer acceptable in this environment.
SLT: Are there any geographical factors in play in the level of interest for the auction process?
Chris Poikonen: No. The eSecLending Auction Process can translate across markets as the process is increasingly proving to be a valuable price discovery tool used to facilitate informed decision making.
SLT: What are some of the challenges and opportunities in the current securities lending market place for new ideas like this?
Chris Poikonen: Although securities lending auctions are not new, they are certainly being viewed with a fresh perspective given their increasing relevance in today’s market.
Launching new innovations in today’s market can be challenging for institutions that are tightly managing costs or are subject to the objectives and priorities of their other/primary business lines. Firms who can continue to innovate and refine their products during periods of volatility will be well positioned to respond as beneficial owners evaluate alternative providers.
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