Bill Comparison Made Easier

EquiLend Looks to Lessen Errors in Shorting Process

Securities lending consortium EquiLend is looking to simplify the lives of its members and their clients. This month, EquiLend expects to expand its bill comparison product, which it believes will streamline stock lending and make spotting errors easier. Bill comparison is a key product used by short sellers and others in the securities lending business.

A bill for a monthly securities lending account can contain thousands of pages. When brokerages and banks use securities lending services, parties and counterparties generate fees and rebates. The prime brokers and the custody banks are the main users of the EquiLend platform, which provides both pre- and post-trade services.

Big Deal

Bill comparison is a big deal in the securities lending business,” Brian Lamb, CEO of EquiLend, tells Traders Magazine. So bill comparison interface will be easier to use, making discrepancies easier to spot. “What we’re basically doing is improving that user interface,” Lamb says. Matching, pros will attest, is how a trade can go bad.

“If bills don’t match, there could be a billing discrepancy. There could be undercollaterization, or a corporate action, or an event that needs to go a certain way,” Lamb says.

Lending is offered in equities and fixed income, but harmonization is one of the consortium’s goals to help build the securities lending industry, EquiLend officials say. For example, today they boast that they offer the same platform regardless of asset class in some two dozen countries. Hedge fund clients see securities lending as a way of finding additional alpha, while long-term institutional investors see that securities lending promotes market efficiencies, Lamb says.

EquiLend Holdings is a seven-year-old consortium that came together to develop the equivalent of a good housekeeping seal of approval for securities lending. But EquiLend critics say the consortium was formed to protect the profit margins of the members through a virtual cartel.

Its competitors include giant interdealer broker ICAP and vendor SunGard, among others. SunGard once considered becoming a member of EquiLend, but discussions were unsuccessful. Lamb acknowledges that his firm is now butting heads with SunGard Data Systems, which has been the top player in this technology niche, with products such as Loanet and Martini.

Bill comparison services offered by securities lenders reduce problems in the monthly billing cycle. Without bills that match between lenders and borrowers, problems will follow. Fewer potential problems mean clients can confidently take on more leverage, according to Lamb.

Bringing Order

The service is an example of EquiLend’s strategy to capture a bigger part of the $3.5 trillion global securities lending market: try to find a common securities lending standard that the biggest players will use to bring “order” to the business. EquiLend was born several years ago out of the industry’s common needs as well as its limitations, say its founders.

“At that point, we had a rather fragmented transmission system, because all of us were developing our own technologies,” says a veteran official of the 11-member consortium, who didn’t want to be quoted by name.

“We came together in a marketplace that didn’t have standards, and we created standards,” Lamb explains.

That’s the historical argument of EquiLend. But history can be a controversial subject. Critics say EquiLend was born as a cartel. They charge that EquiLend was imposing a large tariff on those who wanted to join the consortium. Lamb dismisses those charges, saying they are not true.

Despite differences between EquiLend and some of its competitors, an industry analyst says the key issues are which standards and which platform will dominate the growing securities lending business.

There could also be additional competition. “You may see custodian banks creating their own securities lending environment and bypassing the major dealers, keeping them out of the liquidity pool,” says Mayiz Habbal, director of the securities and investments group for Celent.

Habbal adds that the custodian banks aren’t going ahead with their own platforms today, but might do it sometime in the future. He says there’s truth to both the cartel and good housekeeping versions of EquiLend’s birth. EquiLend members saw that money being made in the back office could also be made in the front office, he says.

“It was really a pre-emptive move by major dealers to enter into this business (securities lending) and protect it,” according to Habbal. Still, Habbal, who praises the EquiLend model and says it has done well so far, nevertheless argues that it is hedging its bets.

He points to ICAP’s recent introduction of i-SEC, a screen-based product that provides securities lending services throughout most of Europe.

“EquiLend can work with that product. You can use it and still use EquiLend for the post-trade. That was very smart,” he says. Securities lending can greatly reduce the rate of trading failure, providing more liquidity and encouraging clients to take on more leverage, EquiLend officials say.

Fewer Headaches

The potential of fewer problems also means that the clients will borrow more, Lamb says. “It really allows a firm to grow their business by a multiple, while not having to invest more in additional resources,” Lamb says. EquiLend now records some 15,000 transactions daily in 25 countries. On the horizon for EquiLend, Lamb says, will be a push for more lenders to accept its standards or join the consortium.

“That’s nice,” says an official of one of EquiLend’s big competitors when asked about its push for common standards. “But we have a platform that has been around for many years, and we see no reason to change it. Besides, ours does a lot more than theirs does.”

EquiLend’s History

EquiLend is a common effort by major lenders to develop an international platform for stock lending. EquiLend’s charter says its platform increases securities lending efficiency “by standardizing, centralizing and automating front- and back-office processes.”

It was formed through a consortium of the biggest prime brokers and agent lenders in 2001. The founding members put up some $40 million, and the platform went live in 2002. Members are: Barclay Global Investors, Bear Stearns, Credit Suisse, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Northern Trust Corp., State Street Corp. and UBS.