Over the first three months of the year global lending revenues increased by 15 per cent YoY as US equity special balances went to the moon and back. IHS Markit’s Sam Pierson walks through the Q1 data
Global securities finance revenues totalled $2.6 billion for Q1 2021, a 15 per cent year-on-year (YoY) increase. Returns increased 11 per cent sequentially, as compared with Q4 2020. The new year came out of the gate at a sprint pace, with the short squeeze in US equities and soaring borrow demand for US treasuries. Growth in fixed income borrow demand extended to corporates and exchange-traded products as well. Global lendable assets reached a record high in Q1, $30 trillion, while on-loan balances reached a post-global financial crisis (GFC) high of $2.7 trillion.
APAC equity
Asia Pacific (APAC) equity finance revenues of $404 million reflect a decline of 6 per cent YoY; however, the trend is upward, with March posting a YoY increase of 4 per cent. Daily average loan balances increased by 13 per cent YoY while narrower fee spreads dragged on returns. Asia equity special balances averaged $8.7 billion for Q1, an 11 per cent YoY decline. The YoY comparison is materially impacted by the South Korea short sale ban, which is due to substantially conclude in May 2021. Compared with Q4 2020, APAC special balances increased 37 per cent in Q1, reflecting a steady increase from the low point in November 2020. Special balances are defined in this note as balances with a fee greater than 500bps.
Depository receipts
Revenues from lending American depository receipts (ADRs) increased 279 per cent YoY for Q1. Most of the increase was driven by Hong Kong SAR domiciled Futu Holdings, which generated $191 million in Q1, 66 per cent of the total ADR return. Excluding the impact of Futu, Q1 ADR revenues increased 30 per cent YoY. Depository receipts listed outside the US generated $16 million in Q1, a 74 per cent YoY increase.
Americas equity
Revenues for Americas equities came in at $996 million for Q1, a 13 per cent YoY increase. Americas revenues declined 2 per cent sequentially compared with Q4 2020. The YoY revenue increase in aggregate was the result of higher loan balances, though the quarterly aggregation belies substantial variation by month. In January, average fees were up 32 per cent compared with 2020, while loan balances were up 13 per cent, both reflecting the broad short squeeze for shares with elevated short interest. For March, the decline in special balances weighed on average fees by more than enough to offset the YoY increase in loan balances. Americas specials balances averaged $15.5 billion for Q1, a 56 per cent YoY increase, and 17 per cent sequential increase compared with Q4 2020.
European equity
European equity revenues came in at $294 million for Q1, a 5 per cent YoY increase. Revenues declined 17 per cent sequentially compared with Q4 2020. The decline compared with Q4 2020 was impacted by the drop-off in balances following the January short squeeze, most notably including Varta Ag. Specials balances for Europe, the Middle East and Africa averaged $3 billion for Q1, a 22 per cent YoY decline and 45 per cent sequential decline compared with Q4 2020.
Exchange-traded products
Global exchange-traded products (ETP) revenues totalled $137m for Q1, the highest quarterly revenue ever recorded, representing a 42% YoY increase. Loan balances increased by 41% YoY, the largest contributor to revenue growth. However, average fees also increased 6 per cent YoY. Loan balances reached a new all-time high on 23 March, $102 billion, with the final uptick to the record driven by Penn National Gaming & Caeser’s Entertainment being added to the S&P 500. That narrowly edged out the prior record set in December when Tesla was added to the S&P 500. Fixed-income products generated 27 per cent of Q1 ETP revenues, up from 18 per cent for full year 2020.
Corporate bonds
Corporate bond lending returns came in at $36.3 million for Q1, a 17 per cent decline YoY. The YoY comparisons continue to be driven by narrower fee spreads, with global loan balances with positive spreads reaching a post-GFC record, $225 billion, during the last week of the quarter. Lendable assets reached an all-time high in December, though declining valuations for investment-grade corporates drove lendable value lower in Q1.
Government bonds
Government bond borrow demand remains robust, with nearly $1.2 trillion in average positive fee global balances for Q1 reflecting a 20 per cent YoY increase. Revenues totalled $383 million in Q1, a 4 per cent YoY increase. US government bond lending revenue came in at $230 million for Q1, a 7 per cent YoY increase. The most revenue-generating bond was the 10-year due November 2030, which saw substantially greater loan balances than prior 10-year notes. The US treasury 10-year due Feb 2031 delivered a revenue uplift in March, trading special for longer than prior issues, albeit with lower loan balances than the November 2030 note.
Conclusion
If the year 2020 felt like a decade, Q1 2021 was a lifetime. The short squeeze in January drove the most monthly equity finance revenue on record for US equities. Equity special balances ended the quarter well below the January peak. However, a positive signal is found in the relative underperformance of crowded US equity short positions in February and March; specials balances declining because the trades are delivering alpha may boost future demand. Beyond directional short demand, corporate actions and capital raising, the latter including special purpose acquisition companies business combinations, are likely to boost demand going forward, along with the resumption of dividends halted or reduced in 2020 and the anticipated conclusion of the remaining short sale bans. Trading in fixed income products picked up with renewed vigour in Q1, as global growth expectations ratcheted up substantially.
Borrow demand for investment-grade credit also received a tailwind from rates volatility. Varying expectations about the course of action for the Federal Reserve, inflation and economic growth appear likely to persist into the remainder of 2021. Tying the themes together, as often they do, ETPs saw soaring demand for credit, rates and equities in a record-setting.
