ANCHORAGE, Alaska — After nearly 20 years of offering securities lending to custodial agent services for fixed income securities, Alaska USA Trust Co. has added conduit lending services to its lineup.
This new service leverages the trust company's transactional capabilities and was the result of an agreement with LendEX, (www.lendexchnage.com) a newly launched firm backed by former Securities and Exchange Commission Chairman Harvey Pitt and John Tabacco, founder of an online stock tracking company.
Potential LendEX securities lending participants include insurance companies, public and private pension funds, hedge funds, mutual funds, endowments and banks and broker dealers. Alaska USA Trust will provide conduit lending services for these potential participants and their respective counterparties. The trust company, a wholly owned subsidiory of 3.6 billion Alaska USA Federal Credit Union, has more than $7 billion in assets under administration and serves approximately 600 institutional and individual investors.
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"Our job is a conduit," explained Glenn Cipriano, president of Alaska USA Trust. "We are not an agent, we don't arrange deals and the assets are not in our custody. LendEX has created their own portal and will list securities for people who want to borrow them."
On April 1, LendEX officially announced its launch. Pitt predicted that regulators will issue new securities lending rules this year based on his belief that "there is a need for higher legal standards." The subprime fallout and recent credit crunch "tracing their origins to the lack of controls in place to assess risk" will also lead to more transparency, the company said.
"LendEX will give beneficial owners and short selling end users a dynamic real-time liquidity pool to more efficient price trades, and achieve higher returns at a critical time for all market participants," Tabacco said.
Most often, banks act in an agency capacity with respect to securities borrowing and lending transactions, according to the Office of the Comptroller of the Currency. However, at times, they may engage in these types of transactions as principal. More recently, the industry has recognized securities lending activities where banks serve as a conduit or credit intermediary between a borrower and the owner of the securities, which means taking on a principal role with respect to securities that may be ineligible for a national bank to purchase for its own account, the agency said.
In an April 27, 2005, interpretative letter, OCC said there are situations where customers do not approve certain borrowers for various reasons and otherwise would be unable to earn income on certain securities held in customers' accounts.
"The availability of conduit lending services will provide customers greater opportunities to increase their yields, as well as convenience and flexibility in their securities lending business," OCC wrote, adding banks would also benefit because in addition to being an intermediary, it would receive fee income and provides additional services to customers.
Cipriano said that 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," Cipriano said. "It will be an institutional electronic exchange just like everything else. This looks to be the last vestige of the broker to broker business."
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