December securities finance revenue
19 January 2021
IHS Markit’s Sam Pierson crunches the numbers for the final act of 2020 and explores whether securities lending markets can maintain the positivity seen in December going forwards
Image: Shutterstock
Global securities lending revenues increased by 12 per cent year-on-year (YoY) in December, with $909 million in monthly revenue the most for any month since June, when revenues totaled $971 million. That marks the fourth consecutive month of increasing returns, albeit starting from 2020’s least remunerative month in August.
US equity revenues continued to trend higher throughout December, as the initial public offering (IPO) market turned white-hot. Equity exchange-traded funds (ETFs) also saw an increase in borrow demand, with loan balances reaching an all-time high on 21 December. In this note we will review revenue drivers from December within the context quarter-to-date and year-to-date results.
Americas equity
Americas equity revenues came in at $434 million for December, a 32 per cent YoY increase, and the largest monthly return since July ($436 million). The upswing was largely the result of increased special balances, with average fees increasing 26 per cent month-on-month (MoM), however loan balances also increased by 10 per cent MoM. Americas Q4 equity revenues of $1.0 billion reflect an increase of 4.8 per cent YoY.
US equity revenues came in at $408 million, a 49 per cent YoY increase, and a similar MoM increase. The most revenue generating US equity in December 2020 was Quantumscape Corp (QS) with just over $60 million, an impressive feat considering Quantumscape only went public via a special purpose acquisition company (SPAC) combination on 4 December. The surging demand for QS shares was emblematic of borrow demand for recent SPAC and conventional IPOs, which reached new heights in December. US equity ‘special’ balances, defined here as loans with a fee greater than 500bps, increased 51 per cent MoM from an average of $11.1 billion in November to $16.7 billion in December (nearly reaching the $18 billion peak for 2020, observed in June).
Utilising the IHS Markit Situational Analytics dataset we aggregated current and former SPAC IPOs which went public since the start of 2018 to review the impact on overall US equity finance revenue. In December current and former SPACs delivered $105 million in equity finance revenue, 26 per cent of all US equity revenue. The December SPAC revenue is just more than three times the November tally, however, it’s still only the second most revenue generating month of 2020. In July Nikola Motors generated $106 million in revenue, 95 per cent of the recent SPAC IPO total; In December the most revenue generating recent SPAC was QS, which generated 61 per cent of the SPAC total.
Borrow demand relating to non-SPAC IPOs was also strong in December, with the 2020 vintage of US IPOs generating $62 million in equity finance revenue, more than doubling the November return.
Canadian equity lending returns held steady MoM but remain well below the YoY comparable, which has been the case since March. December revenues of $25m reflect a 53 per cent YoY decline. Cannabis related returns have declined steadily as increased issuance has translated to additional lendable shares and lower fees. Canadian equity average specials balances increased by 9 per cent MoM but remain less than half the average observed over H1 2020.
European equity
European equity revenue increased 26 per cent YoY for December, following November where revenues increased by 25 per cent YoY. The European upswing continues to be concentrated in relatively few equities. EMEA specials balances declined MoM, partly driven by demand relating to the November Unibail EGM subsiding by early December. German equity lending revenues continue to be bolstered by Varta Ag, which delivered $16.9 million in November revenue, however, the German battery maker was upstaged as the top revenue generating security globally after four consecutive months atop the leaderboard. German equity lending revenues totaled $30.4 million for November, an 86 per cent YoY increase.
French equity finance revenues were boosted by Casino Guichard Perrachon Sa, owing to the average borrow fee reaching the highest level since January 2020, a four-fold increase since August, while the firm’s increasing share price boosted on-loan balances.
Asia equity
Asia equity finance revenues notched a small win with December being the most revenue generating month of Q4, however the YoY shortfall persisted with December completing a year where each month delivered less revenue than the 2019 comparable. The largest market, Japan equities, delivered $49 million in December revenues, a decline of 17 per cent YoY and a 15 per cent increase compared to November. Hong Kong equity finance revenues continued to trend higher in December with $32 million in revenue reflecting a 27 per cent YoY increase and the most monthly revenue for 2020. The short sale ban in South Korea continues to limit lending revenue, with $9m in November revenue reflecting a 79 per cent YoY decline. The South Korea ban is set to remain in place until March; Malaysia allowed their short sale ban to expire at the end of December. Asia equity special balances continue the fledgling recovery from the 2020 low point in early November, with December’s $7 billion in daily average special balances being the most for any month since July.
For the full-year 2020 global securities finance revenues totaled $9.3 billion, a 7.4 per cent YoY decline. The year ended on a high note, with December generating the second most revenue for any month of 2020. Looking ahead, the IPO market in the US is likely to generate a lineup of borrow demand events ahead lockup expiries throughout 2021, which will only be bolstered by the surge in SPAC deals. In Europe the expected reinstatement of dividends in 2021 will likely boost lending returns and arbitrage trades driven by capital raising, such as rights issues and convertible bonds, may continue to drive specials balances as well. In APAC the conclusion of short sale bans may be a tailwind for 2021, while some markets such as Hong Kong are currently seeing increased borrow demand. At the end of a tumultuous year there is cause for optimism heading into 2021.
US equity revenues continued to trend higher throughout December, as the initial public offering (IPO) market turned white-hot. Equity exchange-traded funds (ETFs) also saw an increase in borrow demand, with loan balances reaching an all-time high on 21 December. In this note we will review revenue drivers from December within the context quarter-to-date and year-to-date results.
Americas equity
Americas equity revenues came in at $434 million for December, a 32 per cent YoY increase, and the largest monthly return since July ($436 million). The upswing was largely the result of increased special balances, with average fees increasing 26 per cent month-on-month (MoM), however loan balances also increased by 10 per cent MoM. Americas Q4 equity revenues of $1.0 billion reflect an increase of 4.8 per cent YoY.
US equity revenues came in at $408 million, a 49 per cent YoY increase, and a similar MoM increase. The most revenue generating US equity in December 2020 was Quantumscape Corp (QS) with just over $60 million, an impressive feat considering Quantumscape only went public via a special purpose acquisition company (SPAC) combination on 4 December. The surging demand for QS shares was emblematic of borrow demand for recent SPAC and conventional IPOs, which reached new heights in December. US equity ‘special’ balances, defined here as loans with a fee greater than 500bps, increased 51 per cent MoM from an average of $11.1 billion in November to $16.7 billion in December (nearly reaching the $18 billion peak for 2020, observed in June).
Utilising the IHS Markit Situational Analytics dataset we aggregated current and former SPAC IPOs which went public since the start of 2018 to review the impact on overall US equity finance revenue. In December current and former SPACs delivered $105 million in equity finance revenue, 26 per cent of all US equity revenue. The December SPAC revenue is just more than three times the November tally, however, it’s still only the second most revenue generating month of 2020. In July Nikola Motors generated $106 million in revenue, 95 per cent of the recent SPAC IPO total; In December the most revenue generating recent SPAC was QS, which generated 61 per cent of the SPAC total.
Borrow demand relating to non-SPAC IPOs was also strong in December, with the 2020 vintage of US IPOs generating $62 million in equity finance revenue, more than doubling the November return.
Canadian equity lending returns held steady MoM but remain well below the YoY comparable, which has been the case since March. December revenues of $25m reflect a 53 per cent YoY decline. Cannabis related returns have declined steadily as increased issuance has translated to additional lendable shares and lower fees. Canadian equity average specials balances increased by 9 per cent MoM but remain less than half the average observed over H1 2020.
European equity
European equity revenue increased 26 per cent YoY for December, following November where revenues increased by 25 per cent YoY. The European upswing continues to be concentrated in relatively few equities. EMEA specials balances declined MoM, partly driven by demand relating to the November Unibail EGM subsiding by early December. German equity lending revenues continue to be bolstered by Varta Ag, which delivered $16.9 million in November revenue, however, the German battery maker was upstaged as the top revenue generating security globally after four consecutive months atop the leaderboard. German equity lending revenues totaled $30.4 million for November, an 86 per cent YoY increase.
French equity finance revenues were boosted by Casino Guichard Perrachon Sa, owing to the average borrow fee reaching the highest level since January 2020, a four-fold increase since August, while the firm’s increasing share price boosted on-loan balances.
Asia equity
Asia equity finance revenues notched a small win with December being the most revenue generating month of Q4, however the YoY shortfall persisted with December completing a year where each month delivered less revenue than the 2019 comparable. The largest market, Japan equities, delivered $49 million in December revenues, a decline of 17 per cent YoY and a 15 per cent increase compared to November. Hong Kong equity finance revenues continued to trend higher in December with $32 million in revenue reflecting a 27 per cent YoY increase and the most monthly revenue for 2020. The short sale ban in South Korea continues to limit lending revenue, with $9m in November revenue reflecting a 79 per cent YoY decline. The South Korea ban is set to remain in place until March; Malaysia allowed their short sale ban to expire at the end of December. Asia equity special balances continue the fledgling recovery from the 2020 low point in early November, with December’s $7 billion in daily average special balances being the most for any month since July.
For the full-year 2020 global securities finance revenues totaled $9.3 billion, a 7.4 per cent YoY decline. The year ended on a high note, with December generating the second most revenue for any month of 2020. Looking ahead, the IPO market in the US is likely to generate a lineup of borrow demand events ahead lockup expiries throughout 2021, which will only be bolstered by the surge in SPAC deals. In Europe the expected reinstatement of dividends in 2021 will likely boost lending returns and arbitrage trades driven by capital raising, such as rights issues and convertible bonds, may continue to drive specials balances as well. In APAC the conclusion of short sale bans may be a tailwind for 2021, while some markets such as Hong Kong are currently seeing increased borrow demand. At the end of a tumultuous year there is cause for optimism heading into 2021.
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