Mellon loses head of securities lending

As a member of the corporation's management committee, Newman reported directly to the executive committee. The firm suggested that he should instead report directly to the global head of custody, which Newman regarded as a lowering of his business' status, prompting his resignation.

Newman previously held senior positions in Morgan Stanley's securities lending business.

Mellon says that Newman has left to pursue other interests and that "things happen and it would not be prudent for Mellon to comment".

According to a spokesman, Mellon has "completed a period of restructuring". Industry veteran Kathy Rulong has replaced Newman at the helm of the securities lending business.

Rulong joined Mellon through its management development programme in the early 1970s after graduating from Northwestern University in Chicago.

She left the firm after five years to work for a Pittsburgh-based accountancy firm before returning to Mellon in 1984.

She joined the securities lending division in 1998 and was responsible for managing the firm's US domestic lending operation.

Some analysts have expressed surprise that Jamie Ball, who runs the international securities lending operation in London and has been instrumental in the firm's progress in Europe, was overlooked for the top job.

Rulong points out the management change does not mean that there will be any fundamental shift in its securities lending strategy - one that has been severely criticised in the past and vigorously defended by Mellon.

The criticism has stemmed from Mellon's specialism in hard-to-borrow stocks, which differentiates it from other lenders, and its use of an auction where borrowers bid for hot stocks.

Many borrowers feel that this process forces them to pay over the odds.

Furthermore, they believe that it goes against the ethos of the securities lending industry, where established relationships between individuals and firms allow stock to be borrowed and lent at below-market rates on the understanding that fair treatment will be repaid in kind.

Mellon's view is that as long as its underlying customers are happy, it will continue to plough the same furrow. The firm says that any relationship has to be based on respect, rather than on the fact that one or both of the counterparts in the relationship are seen as an easy touch.

Before he left the firm, Newman said: "We recognise that securities lending is an asset management business. People are beginning to realise that you can extract maximum value and provide the highest risk-adjusted returns.

"We believe that most borrowers are attuned to our strategy - 85% are happy, because it doesn't matter who you are, you can compete through the auction process. Once borrowers understand the process, they are willing, in most cases, to play by those rules."

Mellon counters accusations that its strategy penalises borrowers by saying that many of its competitors leave money on the table.

The firm launched its auction system, iBid, more than a year ago. It specialises in auctioning stocks through the internet and is designed to capture the greatest value from lending special issues. Bidding is opened to a large number of borrowers simultaneously across the globe.

The firm says that systems such as iBid are the best means of providing greater transparency. With the arrival of systems such as EquiLend and SecFinex in the past year, the drive towards transparency has gained further momentum.