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ESecLending Starts Up RIA to Support U.S. Mutual Funds

Securities lending agent ESecLending has created a registered investment adviser (RIA) to offer cash collateral management solutions to U.S. mutual funds.

“ESecLending has a dedicated portfolio team managing about $50 billion in cash collateral, and clients can chose to follow eSecLending’s strategies, manage a portion of their cash collateral in-house or use an outside portfolio manager for this service,” explained eSecLending president Chris Jaynes. The new firm, Securities Finance Global Advisors (SFGA), will operate out of eSecLending’s Boston headquarters.

Under U.S. law, an investment adviser must be registered in order to provide discretionary investment advice to mutual funds. With SFGA, “we can now provide a Rule 2a-7-compliant investment strategy to our mutual fund client base,” said Jaynes, referring to the Investment Company Act rule governing the investments that mutual funds can make with their idle cash. The funds cannot hold more than 5 percent of their cash in a single issuer and can only invest money in the highest investment-grade debt instruments.

ESecLending does not consider itself an electronic trading platform like EquiLend, Icap or SecFinex but it does allow borrowers and lenders to meet in an automated environment through an auction-based process in which it performs the same functions as custodial agent lenders. The firm manages over $500 billion in lendable assets on behalf of its global client base.

Though Jaynes acknowledged that eSecLending competes with custodial and other third-party lenders who also have Rule 2a-7 programs, he said that his firm provides “highly customized lending strategies and personalized service to provide clients with greater control and transparency” than do other intermediaries through their “pooled” approach.

According to Jaynes, eSecLending has already signed up a handful of mutual funds for the new collateral management service, which is offered in conjunction with its auction-based securities lending and borrowing platform. “As our firm continues to grow,” he said, “we remain focused on broadening our product and capabilities to best service our expanding client base.”

U.S. stock lenders have traditionally preferred cash collateral because it poses a lower investment risk and provides the opportunity to reinvest in a separate pool to increase potential yield. But a recent Vodia Group survey found that 38 percent of global asset management firms lost money in their cash collateral pools over the past year.

Jaynes said that reinvestment loss should be mitigated with eSecLending’s new service because of the high-grade quality and short-term length of the investments. Rule 2a-7 allows for investments of up to 90 days in maturity, but eSecLending’s strategy will have a target duration of ten days or less.

ESecLending will continue to depend on third-party software from vendors such as Charles River Development to provide accounting, portfolio management and pre-trade compliance for their cash collateral strategies. However, it will use an undisclosed custodian bank to mark to market the value of the assets held on a daily basis.

EsecLending, which also has offices in London and Burlington, Vt., launched in 2000 under the majority ownership of London’s Old Mutual. In May 2006, it was purchased by Boston-based private equity firm TA Associates.

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