Boston-based eSecLending has carried out “several custom” peer-to-peer securities lending and repo transactions for clients over the past year.

The third-party lending agent told Global Investor/ISF it has facilitated a number of direct trades between pension funds and other alternative counterparties.

“We expect to see many more of these trades going forward,” said Chris Jaynes, the firm’s president, head of client relationship management and business development.

“These alternative structures will fill the void left by banks and brokers who can no longer support certain securities lending and repo transactions due to increased capital costs.”

Direct or peer-to-peer lending offers an option for beneficial owners to lend securities to other pension funds, insurance companies and CCPs, bypassing the credit of a major bank borrower. 

Many of these entities have higher credit ratings and a better credit profile than traditional bank or broker dealer borrowers or repo counterparties. 

Profitable areas of lending programmes

Meanwhile, Jaynes says US small cap stocks and Asia equity markets have been the most profitable areas for lending programmes over the past twelve months.

Beneficial owners have also seen significant revenues generated from a relatively small number of individual specials globally, particularly in the energy and consumer discretionary sectors. 

“The beneficial owners who have benefited the most are those that have adjusted their programs to take advantage of new opportunities,” says Jaynes.

“Adding new markets and/or collateral types, and employing multiple routes to market and trade structures including exclusives and term are some of those opportunities.

“Those clients that actively manage their programs and adapt as the markets evolve will continue to benefit as changing market conditions continue to create new opportunities for beneficial owners.”

Jaynes adds that eSecLending has also seen growing demand for lower spread borrows, known as general collateral, over the past year.

General collateral (GC) names provide lower returns than ‘special’ or hard to borrow names

Jaynes puts this trend down to prime brokerage ‘long supply’ decreasing and some lending agents placing minimum hurdle rates on general collateral lending due to regulatory costs. 

“We expect demand for general collateral activity to continue to be dislocated throughout 2016, as various lending agents determine the return on regulatory capital they need to indemnify their clients,” he  adds.