Building partnerships: Increasing trust and optimal outcomes
10 December 2024
eSecLending’s Brooke Gillman, Peter Bassler, and Jim Moroney pull back the curtain on the firm’s journey over the past 25 years, how prospects become clients, and partnering with borrowers to bring solutions to market. Carmella Haswell reports
Image: eSecLending
Entering the industry as an asset management organisation, and going on to have launched a new way to approach securities lending in partnership with a large institutional investor, eSecLending has transformed over the last 25 years.
As with most startup businesses, the firm began from zero, but today it holds north of US$1 trillion in lendable, with approximately US$150 billion in on-loan balances.
While the company still manages individual, segregated, and unique programmes built around specific client goals, one of the key aspects that the team at eSecLending is trying to manage going forward is controlling the company’s growth.
As Peter Bassler, managing director, head of business development, says: “We don't want just any client. We are very strategic, we pass on more business than we go after, and so we're looking for the right relationships and trying to service a certain group of beneficial owners that really care about securities finance and want to be innovative.”
Founded in 2000 as an alternative to traditional custodial and other third-party pooled lending models, the firm is partnering with borrowers, navigating the complex and unpredictable regulatory landscape, as well as striving for transparency with clients.
Following the market
As a pure startup business, the firm gained the California Public Employees' Retirement System (CalPERS) as a large founding client, a relationship that continues today. While the pension fund was the firm’s core public fund, eSecLending now has five of the top six US public pension plans as clients.
Having been with the company for 16 years, Bassler indicates: “Our initial focus was on the lending side, auctions, and exclusives. Since then, we built out the cash management business and incorporated indemnified repo, which has been an extremely important tool for us. And we have become more creative with borrower connectivity, directly with clients, given our individual segregated programme structure.”
As the new kid on the block (comparatively), Jim Moroney, managing director, head of global equities and corporate bond trading, says the firm has followed the market in terms of securities lending, during his eight-year tenure.
He explains: “We have onboarded several clients in the last three to four years, all fitting the same DNA that we have historically serviced. Our priorities have remained the same, it is client focused at eSecLending, which is unique compared to other programmes.”
On the other hand, Brooke Gillman, managing director, global head of Client Relationship Management, has been with eSecLending since it was founded nearly 25 years ago. She explains that the firm’s consultative approach with clients increases trust and leads to more optimal outcomes.
“We often say at eSec: ‘We manage your programme, while our competitors think of it as the client joining their programme.’ That’s a big difference in mindset. And that absolutely remains the case today,” she insists.
While the business is facing a lot of growth, in terms of its priorities and approach, the fundamentals remain the same. Gillman adds: “That is what made the business successful over the years. We are client-centric all the time.”
A turning point
A turning point in eSecLending’s journey was its leap from a lending agent, which provided auctions and exclusives, to a lending agent with a full solution.
From the beginning, eSecLending has taken a different approach from other service providers in the industry, Gillman states. From day one, every client programme has been separately managed, and lent as an individual account. The non-pooled approach allows the firm to provide flexible solutions, enabling the firm to be nimbler in addressing borrower demand changes.
To manage pricing inefficiencies in the market, eSecLending (known to counterparts as an auction house) would utilise the blind auction process on a competitive, blind bid basis. Auction is a way for the firm to obtain pricing information from the market, and to make informed decisions on how best to trade assets and extract premiums.
As part of the company’s evolution, the team realised that clients were looking for a full solution — leading the firm to develop different components of securities lending in the early years of its expansion. This involved forming full securities lending agent capabilities to support the entirety of a loan lifecycle from the point of an auction to trade decisions, to back office support and the ongoing risk and operational oversight.
While exclusives remain an important component of the business overall, the firm has a significant business profile in the more traditionalist, daily traded discretionary lending market.
During its journey, eSecLending has come across a number of pivotal moments, which has led the firm to where it is today. One pivotal moment in particular, includes the firm’s move to hold its own conferences for clients.
In Bassler’s eyes, clients are the firm’s best advocates, and so by allowing them to get together and discuss among themselves, it led to clients wanting to trade with one another and for more connectivity in the market.
Bassler adds: “In our business, this is a pivotal moment for us because clients want to transact with each other, and we support them because we innovate around where our clients want to go. Many of our competitors create products and try to build businesses around them, whereas we are looking to evolve with our clients.”
Making a connection
Engagement with clients, prospects, and counterparts is key for eSecLending. Here, connection and transparency are at the core of maintaining these relationships.
Gillman explains: “We are overly transparent with clients, and therefore our clients have a much greater view of how their securities lending programme functions, operates, performs, what constraints it might have, and what opportunities exist.”
Channels of communication for the firm are explored through podcasts (eSecLending Insights), monthly forums known as eSec Huddle, and client conferences, to name a few.
In addition, eSecLending offers an on-site client team member for clients. According to Gillman, this provides “the ultimate transparency” in the sense that when clients make use of this option, an eSecLending employee is placed in their office and becomes part of the client’s team.
Gillman highlights: “Our on-site client person is a resource for them that can help react, respond, communicate, and engage on issues or opportunities throughout the day. Over time, there grows a level of partnership and trust because of the transparency that it provides. Clients see us as being on their side, and importantly, they do not see any conflict of interests with us.”
In terms of prospects, Bassler says the firm's approach is long-term, relationship driven, and about adding value, education, and developing that rapport and understanding of what the firm does and how it can benefit them.
Importantly, eSecLending works to treat prospects as a client, even during the sales cycle. It is all about “waiting for a window of opportunity” where eSecLending can compete for their business — several clients which the company has “won” this year have been prospects for decades.
Speaking to Securities Finance Times, Bassler admits: “We pull back the curtain on everything we do and there isn't just one person that prospects face off with across our organisation. In a lot of firms, there is one person that can be a gatekeeper, but at our company, all our senior level people know the clients, and I think that's interesting.
“We also share things, like credit reports and risk analysis, that sometimes the big banks are leery of. We also share our full indemnification policy document — we indemnify through an insurance-backed approach. People expect more transparency, and when we give them more transparency, they feel more comfortable, and they feel much more like it's a partnership. We don’t want to be a vendor; we want to be a partner.”
However, maintaining a certain level of transparency has its challenges. According to Moroney, any number of hurdles can come from being fully transparent with counterparts and clients at the same time, and connecting clients and counterparts can at times create these hurdles.
A scope for change
The global financial crisis brought on a wave of financial regulation, subjecting the industry to “massive changes”, something that looks set to continue. Gillman predicts that there is more change to come with the implementation of Basel III Endgame across jurisdictions.
As global systemically important banks (G-SIBs) face greater regulatory constraints and scrutiny by financial regulators, Gillman understands that bank counterparts and agents in the market have seen “significant increases” to their cost base around securities financing and regulation in the past 10-15 years.
Moroney believes there is “no magic bullet” to cure capital constraints and requirements or financing needs of the borrowers. eSecLending is currently working with various counterparts on central counterparty (CCP) solutions, as well as working with parties on borrower lien solutions, or otherwise known as asset segregation. In addition, the firm has a focus on unique trades, which could be multiple-leg trades, inclusive of repo and swap.
“Those solutions help to solve balance sheet issues and for capital issues such as risk-weighted assets (RWA),” Moroney confirms. “Because we lend on a disclosed basis, our counterparts look to our specific clients to help provide answers to their regulatory needs. And so, we truly act as an agent trying to facilitate business for our clients at a transactional level.”
Over time, Gillman hopes to work with clients on potential credit rating solutions to the extent that it helps a borrower — not all borrowers will benefit from that. The eSecLending team say that RWA constraints are real for its borrowing counterparty base. “Our goal is for all our clients to be a lender of first choice to our borrowing base. To do that, we are trying to put in place as many solutions as possible,” Gillman confirms.
In terms of eSecLending’s positioning in the current regulatory landscape, Gillman says the firm stands apart from its agent bank competitors. eSecLending is a non-Depository Trust Company, regulated under the US Office of the Comptroller of the Currency (OCC).
While its competitors are facing more constraints, Gillman notes that eSecLending is supporting more clients and greater lendable assets because of these regulatory changes. She says: “We've seen more of a shift because banks are less interested to do certain types of trades due to regulatory constraints and costs. We've also seen our clients shift to wanting to trade more and more with one another via peer-to-peer opportunities.”
In addition, Gillman mentions the firm has not seen the same fundamental cost changes to its business model as large banks have. For context, eSecLending sought out an external indemnification policy in the early days of its business. This insurance policy “has a known cost basis” to provide indemnification insurance to clients, and that has remained relatively consistent for eSecLending over its near 25-year history.
“The indemnification is costing our competitors a lot of money, and clients want to do lower spread trades, whether that's just general collateral lending, or for financing purposes,” Bassler adds. “They are coming to us because of some of these regulatory challenges. So that is a big tailwind for us as far as our new business environment.”
For Moroney, the eSecLending model, how the firm is legally structured, allows it to use the firm’s indemnification as opposed to using its balance sheet — meaning the firm is not constrained on an RWA basis.
From a counterpart perspective, Moroney says “we're in an ecosystem”. That ecosystem is X billions of borrows, and the borrowers will allocate business to people who have solutions for them. He continues: “The reason we work on solutioning for a counterpart isn't because we treat them like clients and we want to make them happy, it's because we recognise that if somebody else comes up with that solution, that could be detrimental to our client's ability to extract value from lending securities on a go forward basis.
“We try to be forward-thinking in terms of where the industry is. We’d like to be a leader in that space, and we think it'll benefit our clients.”
Forward focus
While the crux of this discussion with the eSecLending team has revolved around discretionary traditional trading, structuring trades, and structuring solutions, it appears that this focus may not be the case in five years time.
To look back 5 or 10 years previous, would indicate a fixation on the auction process and auctioning in markets that are suited well to exclusives. Moroney predicts that in four or five years, the focus will return to exclusives, especially as the industry embarks upon additional new markets opening.
He explores: “In Asia, there's a handful of short sale bans — as those bans are lifted, there's various solutions that might require exclusives, and might be best suited, from our client's perspective, as an exclusive.
“I would expect the pendulum to shift back towards the solutioning via exclusives in the next five years, maybe outside of the US. New markets are coming, such as Saudi Arabia, and there's a handful behind it that probably suit an exclusive more so than traditional trading.”
In his review, Bassler notes that central counterparties have been a big promise for the industry that has not “lived up to the hype” yet. However, the next few years may see some solutioning in this area.
“We're certainly paying close attention to it and have a project in the pipeline. Many of our competitors look at that as a threat to their business,” Bassler explains. “We look at it as another distribution channel. That piece is something that will continue to evolve over the next five years in a more comprehensive and real way than it has in the last five years.”
Looking forward, Gillman suggests that over the next quarter century, beneficial owners will play a more direct and active role in terms of market participants and engagement — something eSecLending is excited about.
“Allowing the beneficial owners in this marketplace to have a greater voice in the transactions, greater control over what they are doing, and a greater direction over where things go, has been core to our business since we started, and we are finally seeing this trend evolving in the industry,” Gillman explains.
While the banks will still drive much of what is needed, Gillman indicates that the industry will continue to see beneficial owners increasingly engage in and influence the approach that is taken, the solutions that are created, and how the market evolves. Technology and regulatory change are set to continue to play a massive role alongside that.
Though it is difficult to anticipate how the industry will look in five years time, Bassler promises that eSecLending will remain client centric, and “will always solve for where the clients are going, and not create products from our perspective”.
As with most startup businesses, the firm began from zero, but today it holds north of US$1 trillion in lendable, with approximately US$150 billion in on-loan balances.
While the company still manages individual, segregated, and unique programmes built around specific client goals, one of the key aspects that the team at eSecLending is trying to manage going forward is controlling the company’s growth.
As Peter Bassler, managing director, head of business development, says: “We don't want just any client. We are very strategic, we pass on more business than we go after, and so we're looking for the right relationships and trying to service a certain group of beneficial owners that really care about securities finance and want to be innovative.”
Founded in 2000 as an alternative to traditional custodial and other third-party pooled lending models, the firm is partnering with borrowers, navigating the complex and unpredictable regulatory landscape, as well as striving for transparency with clients.
Following the market
As a pure startup business, the firm gained the California Public Employees' Retirement System (CalPERS) as a large founding client, a relationship that continues today. While the pension fund was the firm’s core public fund, eSecLending now has five of the top six US public pension plans as clients.
Having been with the company for 16 years, Bassler indicates: “Our initial focus was on the lending side, auctions, and exclusives. Since then, we built out the cash management business and incorporated indemnified repo, which has been an extremely important tool for us. And we have become more creative with borrower connectivity, directly with clients, given our individual segregated programme structure.”
As the new kid on the block (comparatively), Jim Moroney, managing director, head of global equities and corporate bond trading, says the firm has followed the market in terms of securities lending, during his eight-year tenure.
He explains: “We have onboarded several clients in the last three to four years, all fitting the same DNA that we have historically serviced. Our priorities have remained the same, it is client focused at eSecLending, which is unique compared to other programmes.”
On the other hand, Brooke Gillman, managing director, global head of Client Relationship Management, has been with eSecLending since it was founded nearly 25 years ago. She explains that the firm’s consultative approach with clients increases trust and leads to more optimal outcomes.
“We often say at eSec: ‘We manage your programme, while our competitors think of it as the client joining their programme.’ That’s a big difference in mindset. And that absolutely remains the case today,” she insists.
While the business is facing a lot of growth, in terms of its priorities and approach, the fundamentals remain the same. Gillman adds: “That is what made the business successful over the years. We are client-centric all the time.”
A turning point
A turning point in eSecLending’s journey was its leap from a lending agent, which provided auctions and exclusives, to a lending agent with a full solution.
From the beginning, eSecLending has taken a different approach from other service providers in the industry, Gillman states. From day one, every client programme has been separately managed, and lent as an individual account. The non-pooled approach allows the firm to provide flexible solutions, enabling the firm to be nimbler in addressing borrower demand changes.
To manage pricing inefficiencies in the market, eSecLending (known to counterparts as an auction house) would utilise the blind auction process on a competitive, blind bid basis. Auction is a way for the firm to obtain pricing information from the market, and to make informed decisions on how best to trade assets and extract premiums.
As part of the company’s evolution, the team realised that clients were looking for a full solution — leading the firm to develop different components of securities lending in the early years of its expansion. This involved forming full securities lending agent capabilities to support the entirety of a loan lifecycle from the point of an auction to trade decisions, to back office support and the ongoing risk and operational oversight.
While exclusives remain an important component of the business overall, the firm has a significant business profile in the more traditionalist, daily traded discretionary lending market.
During its journey, eSecLending has come across a number of pivotal moments, which has led the firm to where it is today. One pivotal moment in particular, includes the firm’s move to hold its own conferences for clients.
In Bassler’s eyes, clients are the firm’s best advocates, and so by allowing them to get together and discuss among themselves, it led to clients wanting to trade with one another and for more connectivity in the market.
Bassler adds: “In our business, this is a pivotal moment for us because clients want to transact with each other, and we support them because we innovate around where our clients want to go. Many of our competitors create products and try to build businesses around them, whereas we are looking to evolve with our clients.”
Making a connection
Engagement with clients, prospects, and counterparts is key for eSecLending. Here, connection and transparency are at the core of maintaining these relationships.
Gillman explains: “We are overly transparent with clients, and therefore our clients have a much greater view of how their securities lending programme functions, operates, performs, what constraints it might have, and what opportunities exist.”
Channels of communication for the firm are explored through podcasts (eSecLending Insights), monthly forums known as eSec Huddle, and client conferences, to name a few.
In addition, eSecLending offers an on-site client team member for clients. According to Gillman, this provides “the ultimate transparency” in the sense that when clients make use of this option, an eSecLending employee is placed in their office and becomes part of the client’s team.
Gillman highlights: “Our on-site client person is a resource for them that can help react, respond, communicate, and engage on issues or opportunities throughout the day. Over time, there grows a level of partnership and trust because of the transparency that it provides. Clients see us as being on their side, and importantly, they do not see any conflict of interests with us.”
In terms of prospects, Bassler says the firm's approach is long-term, relationship driven, and about adding value, education, and developing that rapport and understanding of what the firm does and how it can benefit them.
Importantly, eSecLending works to treat prospects as a client, even during the sales cycle. It is all about “waiting for a window of opportunity” where eSecLending can compete for their business — several clients which the company has “won” this year have been prospects for decades.
Speaking to Securities Finance Times, Bassler admits: “We pull back the curtain on everything we do and there isn't just one person that prospects face off with across our organisation. In a lot of firms, there is one person that can be a gatekeeper, but at our company, all our senior level people know the clients, and I think that's interesting.
“We also share things, like credit reports and risk analysis, that sometimes the big banks are leery of. We also share our full indemnification policy document — we indemnify through an insurance-backed approach. People expect more transparency, and when we give them more transparency, they feel more comfortable, and they feel much more like it's a partnership. We don’t want to be a vendor; we want to be a partner.”
However, maintaining a certain level of transparency has its challenges. According to Moroney, any number of hurdles can come from being fully transparent with counterparts and clients at the same time, and connecting clients and counterparts can at times create these hurdles.
A scope for change
The global financial crisis brought on a wave of financial regulation, subjecting the industry to “massive changes”, something that looks set to continue. Gillman predicts that there is more change to come with the implementation of Basel III Endgame across jurisdictions.
As global systemically important banks (G-SIBs) face greater regulatory constraints and scrutiny by financial regulators, Gillman understands that bank counterparts and agents in the market have seen “significant increases” to their cost base around securities financing and regulation in the past 10-15 years.
Moroney believes there is “no magic bullet” to cure capital constraints and requirements or financing needs of the borrowers. eSecLending is currently working with various counterparts on central counterparty (CCP) solutions, as well as working with parties on borrower lien solutions, or otherwise known as asset segregation. In addition, the firm has a focus on unique trades, which could be multiple-leg trades, inclusive of repo and swap.
“Those solutions help to solve balance sheet issues and for capital issues such as risk-weighted assets (RWA),” Moroney confirms. “Because we lend on a disclosed basis, our counterparts look to our specific clients to help provide answers to their regulatory needs. And so, we truly act as an agent trying to facilitate business for our clients at a transactional level.”
Over time, Gillman hopes to work with clients on potential credit rating solutions to the extent that it helps a borrower — not all borrowers will benefit from that. The eSecLending team say that RWA constraints are real for its borrowing counterparty base. “Our goal is for all our clients to be a lender of first choice to our borrowing base. To do that, we are trying to put in place as many solutions as possible,” Gillman confirms.
In terms of eSecLending’s positioning in the current regulatory landscape, Gillman says the firm stands apart from its agent bank competitors. eSecLending is a non-Depository Trust Company, regulated under the US Office of the Comptroller of the Currency (OCC).
While its competitors are facing more constraints, Gillman notes that eSecLending is supporting more clients and greater lendable assets because of these regulatory changes. She says: “We've seen more of a shift because banks are less interested to do certain types of trades due to regulatory constraints and costs. We've also seen our clients shift to wanting to trade more and more with one another via peer-to-peer opportunities.”
In addition, Gillman mentions the firm has not seen the same fundamental cost changes to its business model as large banks have. For context, eSecLending sought out an external indemnification policy in the early days of its business. This insurance policy “has a known cost basis” to provide indemnification insurance to clients, and that has remained relatively consistent for eSecLending over its near 25-year history.
“The indemnification is costing our competitors a lot of money, and clients want to do lower spread trades, whether that's just general collateral lending, or for financing purposes,” Bassler adds. “They are coming to us because of some of these regulatory challenges. So that is a big tailwind for us as far as our new business environment.”
For Moroney, the eSecLending model, how the firm is legally structured, allows it to use the firm’s indemnification as opposed to using its balance sheet — meaning the firm is not constrained on an RWA basis.
From a counterpart perspective, Moroney says “we're in an ecosystem”. That ecosystem is X billions of borrows, and the borrowers will allocate business to people who have solutions for them. He continues: “The reason we work on solutioning for a counterpart isn't because we treat them like clients and we want to make them happy, it's because we recognise that if somebody else comes up with that solution, that could be detrimental to our client's ability to extract value from lending securities on a go forward basis.
“We try to be forward-thinking in terms of where the industry is. We’d like to be a leader in that space, and we think it'll benefit our clients.”
Forward focus
While the crux of this discussion with the eSecLending team has revolved around discretionary traditional trading, structuring trades, and structuring solutions, it appears that this focus may not be the case in five years time.
To look back 5 or 10 years previous, would indicate a fixation on the auction process and auctioning in markets that are suited well to exclusives. Moroney predicts that in four or five years, the focus will return to exclusives, especially as the industry embarks upon additional new markets opening.
He explores: “In Asia, there's a handful of short sale bans — as those bans are lifted, there's various solutions that might require exclusives, and might be best suited, from our client's perspective, as an exclusive.
“I would expect the pendulum to shift back towards the solutioning via exclusives in the next five years, maybe outside of the US. New markets are coming, such as Saudi Arabia, and there's a handful behind it that probably suit an exclusive more so than traditional trading.”
In his review, Bassler notes that central counterparties have been a big promise for the industry that has not “lived up to the hype” yet. However, the next few years may see some solutioning in this area.
“We're certainly paying close attention to it and have a project in the pipeline. Many of our competitors look at that as a threat to their business,” Bassler explains. “We look at it as another distribution channel. That piece is something that will continue to evolve over the next five years in a more comprehensive and real way than it has in the last five years.”
Looking forward, Gillman suggests that over the next quarter century, beneficial owners will play a more direct and active role in terms of market participants and engagement — something eSecLending is excited about.
“Allowing the beneficial owners in this marketplace to have a greater voice in the transactions, greater control over what they are doing, and a greater direction over where things go, has been core to our business since we started, and we are finally seeing this trend evolving in the industry,” Gillman explains.
While the banks will still drive much of what is needed, Gillman indicates that the industry will continue to see beneficial owners increasingly engage in and influence the approach that is taken, the solutions that are created, and how the market evolves. Technology and regulatory change are set to continue to play a massive role alongside that.
Though it is difficult to anticipate how the industry will look in five years time, Bassler promises that eSecLending will remain client centric, and “will always solve for where the clients are going, and not create products from our perspective”.
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