eSecLending
At the beginning of January, The Dow Chemical Company, a producer of chemical, plastic and agricultural products, chose eSecLending to act as securities lending agent for its US pension plan assets.
In a statement, Gary McGuire, chief investment officer of Dow Chemical, said that the firm’s consultative approach was a key advantage, as well as an “ability to customise our securities lending programme to incorporate Dow’s specific risk/return profile”, adding “as we re-engage in securities lending for the first time in several years, we are pleased to be partnering with an institution whose interests are aligned with ours”.
Peter Bassler, managing director of business development at eSecLending, explains why Dow Chemical is returning to the market.
Dow Chemical has a specific risk/return profile—how will eSecLending work to this profile?
Most beneficial owners are looking at the securities lending/intrinsic side of the business to generate returns while taking a conservative approach to the investment of cash collateral. For Dow Chemical, we proposed an approach with additional protections that would accomplish this objective. We are lending to maximise the intrinsic value of portfolios while limiting risk on the cash collateral side of the business.
Dow Chemical is re-engaging in securities lending for the first time in several years—is this indicative of a return to form for the sector?
Dow is re-engaging, and others that take an investment-oriented approach to a re-evaluation should also consider participating again. Oftentimes, funds do not view the business in its component parts (lending and cash reinvestment). Both are separate, unique activities and carry vastly different risk profiles. If funds re-evaluate the risks that they are comfortable with and focus on that part of the business (ie, the loan transaction), there still remains the opportunity for incremental return for a low degree of risk.
Does the nature of the client make you change the nature of your operations? How is servicing a pension fund’s needs different to a another client?
In our programme, we run individual programmes for each client, differing from a pooled or commingled approach that is used by our competitors, and allowing us to design around each lender’s unique requirements. Traditional programmes are often set up to benefit the banks and borrowers in a securities lending programme. As the only true ‘independent’ agent, our programmes have no conflicts of interest and our objectives are aligned with those of our clients.
How do you determine a client’s optimal route to market?
Route to market is typically determined by the client, market conditions, type and size of individual portfolios, and so on. Clients will either use one or both of our execution strategies (discretionary lending and agency exclusives). These decisions are often made in close consultation with us after an auction process.
How is Basel III influencing your offering, if at all?
eSecLending is not affected by Basel III. The bank-managed lending programmes are affected by this and other regulations such as the US Dodd-Frank Act. Both are likely to require higher capital levels for providing indemnification. The current industry view is that this will make indemnification more costly for banks and that this will lead to lower usage or higher costs for beneficial owners. eSecLending uses independent indemnification that already has a hard cost associated with it. Our structure is advantageous from a diversification perspective as these insurance providers are not correlated to our business and have low correlations to the borrowers in the marketplace, which is not the case with bank indemnities.
How do you exercise good corporate governance?
We operate programmes for our clients in line with their corporate governance policies. Based on operating individual programmes at the client level, we can tailor each programme to any and all corporate governance sensitivities. We are also taking a leadership role in this area. Last year, we launched a product called ProxyValue in partnership with Institutional Shareholder Services (ISS). This product enables lenders to evaluate the economic decision of lending alongside the fiduciary decision that comes with the desire to vote proxies from a corporate governance perspective. This is a unique offering in the marketplace.
