Independent feels the squeeze

Larry Shearer

Securities lending has been one of the last areas of banking to lack electronic services. While fixed-income market makers and investors have been spoilt for choice, with platforms such as TradeWeb, MarketAxess, BondVision and Bondscape to name a few, securities lending has struggled to move away from more labour intensive methods.

EquiLend, an interdealer securities lending platform created last year, finally launched in June and is rapidly gaining volumes. SecFinex, an independent platform founded in 2000, doesn't have the same heavyweight backing and has had money troubles, forcing it to cut staff. Market players are divided about its future and smaller borrowers and lenders could lose out if it folds.

EquiLend has its critics but the industry agrees that it is at a distinct advantage while the prognosis for SecFinex does not look good. One industry expert says of SecFinex: "Without a radical change in ownership, more working capital and a bit more bravery in terms of clear and distinct service definition they'll be gone by the end of the year." He adds: "[If they don't make some changes] it will be difficult to be anything other than a baby EquiLend with an international bent." Another banker is even more pessimistic. "The opportunity has been missed now," he says.

EquiLend claims to offer daily borrowing access to more than $1 trillion in assets and since opening in June has seen volumes of more than $120 billion in lending transactions via the platform's autoborrow facility and its one-to-one and one-to-many negotiation screens.

Although lack of transparency in the market means that no-one can corroborate these statistics, another market participant estimates total global securities lending transactions outstanding for equities and bonds at between $1.5 trillion and $2 trillion.

While no-one doubts that EquiLend will increase efficiency and lower costs, some feel its motivations stem from a desire to maintain the status quo. EquiLend automates the front and back end but otherwise does not alter the process. One securities lending banker says: "It's a defensive measure by the banks doing the majority of the business. If they don't do something and lock everyone in, someone else might." Whereas SecFinex claims that, in addition to automating trading, it is looking to increase transparency within the market.

Those with the most to lose raise concerns about the independence of EquiLend. "They [EquiLend] are terrified that if they actively exclude anybody from the process because they'd get sued for antitrust straight away," says one banker. In addition to ensuring the platform is open to all securities lenders and borrowers, a logical and easy way for EquiLend's members to avoid concerns about price-fixing or anti-competitive behaviour would be for the members to support other platforms. Putting business through, for example, SecFinex would assure the market that its prices are not being fixed.

It seems that EquiLend is aimed at the larger players, doing large enough volumes to high-jump the barriers to entry. But Dirk Pruis, its CEO, says: "There is no set minimum volume requirement. We established an indicative level of 1,000 transactions per month below which we felt efficiencies for users would begin to decrease." He stresses: "At some point we may have to re-look at pricing if we get very small players interested in joining the platform."

Pruis refuses to give a figure for annual membership. "The quarterly fee for use of the platform is based on the size of the business," he says. "We have established three tiers based on the number of transactions in a given quarter." Given that the 10 founding members were required to stump up $4 million each as well as invest time and resources in building the platform, it is likely that fees are fat.

Not only are members required to pay a quarterly fee, some also have to overhaul internal IT systems. It is estimated this could cost upwards of $2 million in some cases.

So Pruis may say: "The EquiLend platform is open to all," but indications point to it being very difficult for medium to small tier lenders and borrowers to hook up to it.

But SecFinex's future is not clear, given that it does not have the luxury of the backing of the big players. Larry Shearer, head of sales and marketing at SecFinex, says: "Many of our [40] customers appreciate and are interested in using SecFinex because they do see us as an independent entity not controlled by some of the largest banks."

SecFinex mainly services medium and small tier borrowers and lenders of UK equities, although it is moving into other regions and into bonds. EquiLend focuses on the US market but it does have global ambitions.

Deutsche Bank will be the first non-founding member to join EquiLend - a clear indication of the platform's viability. And Deutsche also uses and supports SecFinex. Darren Johns, global COO for securities lending at Deutsche, doesn't see a conflict. "We have different clientele for each and see the systems as providing different functionality. We plan to run both systems," he says.

Nonetheless, in its drive to gain volumes and its stated aim to be open to players of all sizes, EquiLend will inevitably encroach on SecFinex's territory.

Many in the industry say SecFinex has been too slow to develop. "SecFinex has been financially challenged," says an industry expert. "Now they've launched their third-generation IT platform - the other two weren't that great - and it is well liked. But it took too long and cost too much."

Lee Olley, vice president of equity finance at JPMorgan Chase, says the bank has been unimpressed with SecFinex. "We've been shown the platform on three different occasions in the last two years and we haven't been impressed. Its market is really the vanilla UK equity market and that market already has great liquidity," he says.