Four years ago Boaz Yaari sat in a meeting with a senior prime brokerage executive who described the securities lending market as a ‘Jurassic Park ecosystem.’
“I’m Israeli, so I’ve always had an inquisitive side, but that was like waving a red flag in front of a bull,” Yaari, founder and chief executive of Sharegain, told Global Investor.
As a former derivatives trader and portfolio manager, Boaz was interested in securities lending early on in his career mainly from a borrower perspective.
“I was often amazed by the opaqueness of this market and how lending rates and recalls seemed so arbitrary” he explained. “Since then, it’s been fascinating to see how deep the rabbit hole goes."
It turns out the rabbit hole goes quite some way.
There are more than 45,000 unique securities on loan worldwide according to DataLend and, as of May 2018, over $21 trillion (£15.7 trillion) worth of assets sitting in lending programmes.
According to statistics from IHS Markit, volatility in the first three months of 2018 helped the securities lending industry post its highest first quarter revenue figure (£1.9 billion) in a decade.
“Revenues topped $9 billion globally over the whole of 2017 but I believe that figure could be significantly larger if a wider set of investors became involved,” Boaz suggested.
Large pension funds, sovereign wealth funds, insurers and asset managers dominate the lending pool, often using their custodians or third party agents to handle loans.
Sharegain, Yaari’s first foray into entrepreneurship, was founded in 2015 and is backed by £5 million in funding from venture capital funds and private investors from the financial industry.
The platform’s core objectives? Simplify and commoditise securities lending. Make it available to every investor, improve transparency, liquidity and investor control over the process.
Initially, the firm is targeting family offices, private banks as well as small and medium size wealth management firms not known for lending their assets.
Its first trade took place in July 2017 and involved a family office lending equities to a prime broker. Sharegain collects a small percentage of the revenue.
The end goal is to make securities lending accessible to private investors to the point that all they need to do is log on to their own online accounts and - at the click of the button - activate Sharegain and earn income from lending stocks.
“We’re a fintech but not in the usual sense,” added Liad Amit, Sharegain’s co-founder and chief marketing officer. “Most fintechs try to disintermediate existing markets, while we’re collaborating with our market.
“We’re also generating tangible revenue for clients, not just cost or time savings.” Amit, previously the head of innovation at Bank Hapoalim, explained.
In the traditional institutional securities lending market, service provides increasingly claim to be seeing higher engagement from funds.
At the same time, there are still concerns over risk, pricing and transparency.
Boaz says family offices, high net worth individuals and wealth managers have the same concerns and nearly all want greater control over the process before they even start to think about lending.
“That’s where we come in. Sharegain allows users to actively control which securities they want to lend – under what terms and to who,” he said. “Every term is fully-customisable by a tick of a box or a slide of a slider."
He describes his company as the first “digital securities lending agent”. As well as giving more control to investors, the firm has the technology to run programmes on their behalf and allow them to be as active or as passive as they wish whilst having control and transparency on all processes.
‘Specials’ (securities in demand generating fees at the higher end of scale) are the main focus.
On the collateral side, Sharegain validates the placement of non-cash collateral with a third party custodian in advance.
The platform can notify new loan requests or events that impact portfolios and recall securities when clients want them back.
It can also manage full life-cycle of a loan and communications between borrowers and tri-party agents.
The company recently signed up as a member to the International Securities Lending Association (ISLA), signalling its intent to collaborate and ensure best practices.
Its head of operations, Matthew Barnett, has close to two decades of experience in operations. His last role was the EMEA head of equity finance middle office at Barclays.
“We’re on mission to level the playing filed, take away some of the friction and bring securities lending to the digital age," Boaz concludes.
“We also believe that the introduction of new lucrative supply of specials through Sharegain, will unlock pent up demand that currently cannot be met, for various reasons, by the existing market.”