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Lending from London

According to a recent study by the International Organisation of Securities Commissions and the Bank for International Settlements, securities lending has become such an integral part of securities markets that volume of transactions for financing purposes exceeds that of straightforward purchases and sales. Securities lending has moved from being an add-on, back office operation to become an important stand alone product.
Increased market sophistication has driven this renaissance and State Street has reacted accordingly. So much so, it moved operations for its European securities lending clients from Boston to London towards the end of last year. Ralph Vitale, head of global securities lending, says the creation of a operations presence in London dovetails nicely with State Street focusing its products on the European markets. At present it employs around 1,000 people in London and intends to increase this to over 1,500 this year. Says Vitale: “There’s a great tendency to think of us as that great big US custody bank but I think we’re known more and more for our European presence.”
Developing and running the new outfit is Michael Ellard, previously head of securities lending in London for the Bank of New York. Ellard will report to both Robert Ash, senior vice president and Jack Saraf, vice president of State Street’s global securities lending business. The team has also created a new position of vice-president of sales and marketing and appointed Clive Rickards, formerly part of the custody group at Bankers Trust, who also reports to Ash.
Growth has been substantial in all business areas in Europe and, at the latest count, State Street had $6.7trn (e7.6trn) in assets under custody. Vitale says the company has recognised the global nature of many of its clients and hence the need for an equally far-reaching infrastructure. State Street has had a securities lending presence in London since 1987 and a sales team since the early 1990s. “The one piece of the puzzle we didn’t have was an operations practice,” says Vitale. Since September, Ellard has recruited a team of 12 that has since trained in Boston, returned to London and started up. “They’re doing a fabulous job, and between them have a lot of experience,” says Vitale. There are no immediate plans to expand the team further although it will grow organically as European business increases.
Securities lending has traditionally grown in line with equity markets so it’s no surprise it has become more significant in the past decade. Says Vitale: “securities lending is very important to a large number of our customers. When customers come to us to service their accounts, they more often than not want to buy more than one product.” As an illustration, State Street’s largest 1,000 clients use on average between six and seven services and, for larger institutions, securities lending has proved extremely popular.
In technical terms, the move to London is unlikely to affect clients. In today’s hi-tech world, a security loan in Europe can be executed as effectively in Boston as in London. Where it will benefit clients is the ability to see transactions carried out locally and Vitale says it will also help those running the operation as they are closer to the clients.
When the bank announced the transfer, it cited the rapid expansion of its securities lending business in Europe although Vitale refuses to specify any figures. The move coincided with a coup for State Street. Mediolanum, the Italian financial services group appointed State Street to lend up to E2bn from 18 of its Dublin-domiciled multi-manager funds. State Street will predominantly be lending European equities from France, Germany, the Netherlands and Italy.
The bank already enjoys a relationship with the Italian group – State Street Global Advisors already manages nine of the 18 funds. Yet, at the time of the deal, Guiseppe Lalli, general manager of foreign operations for Gruppo Mediolanum, had the following to say: “We selected State Street because we feel confident that, as one of the leading securities lenders in the world with an unparalleled knowledge base, State Street is best positioned to help us optimise the performance of our international portfolios.”
As Vitale says, once a market begins to increase in sophistication, so it is a harbinger for securities lending. The introduction of the euro will have a great effect on the business and there has already been an increase in euro-denominated lending. Vitale feels as the euro market deepens the surge in lending will continue and last year State Street launched a euro-denominated collateral fund.
Vitale believes the group’s approach has an edge on competitors by recognising the service was part of the investment management process opposed to a back office role. According to Vitale securities lending is cyclical, the latest hiccup being the interest rate crisis in the US during 1994–95 when the Fed tightened up the economy. “The way we’ve run the business is to get strong, consistent returns for customers,” he says.
Since securities lending grew from custody, most of the large custodians provide ample competition for State Street and many of the investment banks are lending as principals (it acts as an agency). So, perhaps it’s just as well State Street has shifted its European operations to London. As Vitale says: “Like everything else in the financial world, everyone is vendor, customer and competitor.”

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