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March 19, 2008

New Securities Lending Exchange Finds CCP

By Gregory Bresiger

Lendex LLC, looking to establish an electronic securities lending exchange, signed an agreement with a small trust company to act as the exchange's central credit counterparty (CCP).

Alaska USA Trust Company-one of the smaller trust companies, compared with banks like State Street or Northern Trust-will not bring inventory for lending, but will ensure the credibility of transactions on the exchange and guarantee them. Officials of Alaska USA Trust said their direct links to the industry utility are important to any new securities lending platform.

"We are a member and shareholder of the DTCC (the Depository Trust & Clearing Corp.)," Glenn Cipriano, president of the Alaska USA Trust Co., told CQ&D.

With some $8 billion in assets under administration, Alaska USA Trust is dwarfed by custodians such as State Street and Northern Trust. However, Alaska USA Trust officials, who have been in securities lending for some 20 years, said they will not bring any inventory to the new exchange, due to begin operations in April (see cover story). Alaska USA Trust's role will be solely as the CCP.

A CCP is critical to the success of any securities lending platform. It becomes a buyer to every seller and a seller to every buyer. The CCP is a middleman. It takes the risk in every transaction, and ensures the creditworthiness of all parties.

"We went with them," said John Tabacco, founder of Lendex, "because we realized they had everything we needed and would be able to maintain our veil of secrecy while doing all our preparations." Tabacco said Lendex never went to the big custodian banks and that no one had expected that they would use Alaska USA Trust as the CCP.

Without a CCP, securities lending players say, borrowers and lenders would generally only conduct business with firms whose creditworthiness they know. This means many would-be transactions would not happen. It would also mean that, without electronic access, information was often in short supply or biased.

This has been an issue holding back securities lending, keeping utilization rates low for borrowable stock, players say. However, Cipriano predicted that securities lending utilization rates would rise in the next few years, after Lendex's planned launch in April.

"Five years from now, it's going to be a completely different market. It will be an institutional electronic exchange, just like everything else. This looks to be the last vestige of the broker-to-broker business," he said.

Alaska USA Trust has almost its entire inventory lent out. But many other firms with securities lending operations have utilitization rates as low as 30 percent. That means firms have a difficult time justifying their securities lending lines, observers say.

Cipriano said the Lendex exchange, along with other electronic securities lending models, potentially could increase those utilization rates, modernizing the business.

But will Lendex or another electronic securities lending platform succeed? Cipriano said success will hinge on ease of use as the key issue.

"I'm a trader, and I have seven screens in front of me," Cipriano said, "and I want to locate a particular stock. If I can go to a Lendex and find out the exactly the current price and the availability, then hit a button and the transaction is done-to me, that would be a major advantage."

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