State Street extends P2P direct access lending product to convertible bonds

Custodian’s peer-to-peer securities finance product will now include convertible bond arbitrage strategies.

By Jonathan Watkins

State Street has expanded its peer-to-peer securities finance product, Direct Access Lending, to allow borrowers to post US convertible bonds as collateral.

The custodian said through the addition of convertible bond arbitrage strategies it hopes to facilitate new clients and strategies entering the program.

State Street’s Direct Access Lending offering enables direct, principal loans between its lending clients and its borrowing clients.  

The product was launched in Q4 2019 and the Boston-based asset servicer has been busy adding both new lending clients and borrowing clients to the US equity security lending program and steadily increasing on-loan balances.

“Direct Access Lending has helped us continue to differentiate from our competitors by providing our clients the cost benefits of a peer borrowing model with the operational efficiencies received from a prime broker,” said Martin Tell, global head of securities finance, State Street. “In addition, providing our clients a peer option within their Enhanced Custody program ensures stability as a trusted financing counterparty. The feedback from our customers has been very strong with the rollout of Direct Access Lending, and we’re seeking to build upon the success we’ve had with this expansion.”  

To facilitate the new collateral type in Direct Access Lending, State Street said it will leverage both its agency lending and enhanced custody programs, each of which already accept US convertible bonds as collateral, to offer both sets of customers the benefits of each program required to operate in a peer-to-peer transaction.  

“We expect significant uptake from both existing and prospective clients and are excited to continue building product capabilities into our best-in-class peer-to-peer program,” added John McGuire, State Street’s global head of business development for securities finance. 

In recent years, peer-to-peer lending has represented a very small percentage of the overall securities finance industry. Participants have yet to fully transition to such solutions for securities lending, mainly due to the fact that many firms do not possess the operational infrastructure to do so. 

The nature of peer-to-peer trading has existed for decades, though the business is seeing an evolution as major service providers enter the space with organised, structured product lines. 

An association has also been set up including some of North America’s largest pension funds to encourage peer-to-peer securities lending.