Lendex LLC, the nascent electronic securities lending exchange backed by former Securities and Exchange Commission chairman Harvey Pitt, has inked a deal with a key partner.
Alaska USA Trust Company will be the central credit counterparty (CCP) for Lendex, which is slated to begin operating in April and is using Pitt’s consulting services. Pitt says that securities lending is antiquated and needs new electronic platforms.
The CCP is critical for a securities lending platform. It becomes a buyer to every seller and a seller to every buyer. The CCP is a middleman, taking the risk in every transaction. It ensures the creditworthiness of all parties.
Without a CCP, securities lending players say, borrowers and lenders would generally only conduct business with firms whose credit worthiness they knew. This means many potential transactions wouldn’t happen. It also means that, without electronic access, information is often in short supply or biased.
The trust company will not bring inventory to Lendex, but will ensure the credibility of transactions on the exchange. Compared to State Street or Northern Trust, Alaska USA Trust is one of the smaller players in the business. Still, the custodian said its 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 Corporation),” said Glenn Cipriano, president of the Alaska USA Trust Company.
Cipriano says securities lending’s growth combined with the use of more electronic tools will transform the business. “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 adds.