Securities finance mid-year snapshot
21 July 2020
IHS Markit’s Sam Pierson breaks down the number behind the securities finance markets earnings for the first six months of the year
Image: Shutterstock
Global securities lending returns in the first half of 2020 fell by 4.8 percent year-over-year (YoY). The utilisation of lendable assets remains elevated YoY in aggregate as well as for most asset classes, despite declining from the year-to-date (YTD) peak in March. The top-level changes belie a variety of asset class and region-specific dynamics which we’ll discuss in this note. Increasing demand for US equity specials, US treasuries and global exchange-traded funds (ETFs) drove increased returns for those asset classes. The revenue shortfall was caused by declining balances and fees for non-US equities, American depository receipts and corporate bonds, however it’s worth bearing in mind that average H1 total return to lendable for all securities increased YoY based on reinvestment contribution.
US equity revenues came in at $1.6 billon for the first half of 2020, an increase of 35 percent YoY (see Figure 1). The revenue increase was driven by a 46 percent YoY increase in weighted average fees, which more than offset the 8.4 percent reduction in average YTD balances. The broad short squeeze in hard-to-borrow shares, particularly in April and early June, had the knock-on impact of increasing special balances broadly. Drivers of the upswing in US equity specials include arbitrage trades relating to convertible bonds, special-purpose acquisition company initial public offerings and exchange offers as well as increased trading of shares in firms which are facing potential bankruptcy.
Canadian equity lending revenues increased sequentially from May to June, however, returns are still lower than they were in 2019, which has been true for each month of 2020 starting in March. Canadian equities had $279 million in H1 2020 revenues, a 2.8 percent YoY decline.
Equity lending in Europe has fallen well short of 2019 returns, with revenues of $695 million reflecting a 35 percent YoY decline. As the Wirecard story descended into scandal, the limited availability of shares in lending programs pushed up on fees resulted in the equity delivering $37 million in YTD revenue, 5 percent of all European equity lending returns. Dividend delays complicate the YoY comparison, which will become clearer this summer.
Asia equity lending revenues remain subdued compared with prior years; H1 2020 revenues of $798 million reflect a 21 percent YoY decline. The largest market, Japan, delivered H1 revenues of $303 million, a 24 percent decline compared with the first half of 2019.
The short sale ban in South Korea has limited lending revenue, equity lending revenues for H1 totalled $169 million, a 20 percent YoY decline. Hong Kong equity lending revenues picked up in May and June, however the Q1 shortfall meant H1 total fell 20 percent YoY. Australian equity revenues totalled $44 million in H1, a 29 percent YoY decline.
Global ETF revenues were $200 million for H1, a 29 percent YoY increase. ETF lending revenues soared in March, with $53 million in monthly revenue, more than double the March 2019 total after falling short of YoY comparison in January and February; Q2 monthly returns were consistently between $32 million to $36 million per month. Most ETF lending metrics peaked in March and declined thereafter but remain well above the January and February observations (including revenues, balances, fees and utilisation).
Fee-based revenue for government bond lending came in at $766 million for H1, an 11 percent YoY increase resulting from larger loan balances; H1 average fees declined YoY as a function of falling short in January and February. US treasuries returned $468 million for H1, a 29 percent increase.
For beneficial owners, returns from lending US treasury securities in 2020 have been substantially bolstered by reinvestment of cash collateral, however reinvestment returns have steadily trended lower since late March. Returns from lending European sovereigns were $228 million for H1, an 12 percent YoY decline as the result of both lower balances and fees, though spreads did widen in April and May which helped to offset declining balances.
Corporate bond lending revenues continue to fall short of 2019 comparison, mostly as the result of declining fees, however, balances have also declined YoY. H1 corporate lending returns came in at $226m, a 29 percent decline YoY.
Short sale bans, central bank support for credit and dividend cuts have dampened borrow demand in the first half of 2020. US equity specials are leading the way into the second half of the year, where the asset class runs into a much more challenging YoY comparison. The increased popularity of retail trading has reinforced the importance of that supply of hard to borrow shares, however utilisation and return to lendable are trending upward for agency lending of US equities as well. Challenges and opportunities abound heading into the second half of the year, close monitoring of results is warranted.
Figure 1
Global securities lending snapshot H1 2020
Figure 2
Global securities lending revenues
US equity revenues came in at $1.6 billon for the first half of 2020, an increase of 35 percent YoY (see Figure 1). The revenue increase was driven by a 46 percent YoY increase in weighted average fees, which more than offset the 8.4 percent reduction in average YTD balances. The broad short squeeze in hard-to-borrow shares, particularly in April and early June, had the knock-on impact of increasing special balances broadly. Drivers of the upswing in US equity specials include arbitrage trades relating to convertible bonds, special-purpose acquisition company initial public offerings and exchange offers as well as increased trading of shares in firms which are facing potential bankruptcy.
Canadian equity lending revenues increased sequentially from May to June, however, returns are still lower than they were in 2019, which has been true for each month of 2020 starting in March. Canadian equities had $279 million in H1 2020 revenues, a 2.8 percent YoY decline.
Equity lending in Europe has fallen well short of 2019 returns, with revenues of $695 million reflecting a 35 percent YoY decline. As the Wirecard story descended into scandal, the limited availability of shares in lending programs pushed up on fees resulted in the equity delivering $37 million in YTD revenue, 5 percent of all European equity lending returns. Dividend delays complicate the YoY comparison, which will become clearer this summer.
Asia equity lending revenues remain subdued compared with prior years; H1 2020 revenues of $798 million reflect a 21 percent YoY decline. The largest market, Japan, delivered H1 revenues of $303 million, a 24 percent decline compared with the first half of 2019.
The short sale ban in South Korea has limited lending revenue, equity lending revenues for H1 totalled $169 million, a 20 percent YoY decline. Hong Kong equity lending revenues picked up in May and June, however the Q1 shortfall meant H1 total fell 20 percent YoY. Australian equity revenues totalled $44 million in H1, a 29 percent YoY decline.
Global ETF revenues were $200 million for H1, a 29 percent YoY increase. ETF lending revenues soared in March, with $53 million in monthly revenue, more than double the March 2019 total after falling short of YoY comparison in January and February; Q2 monthly returns were consistently between $32 million to $36 million per month. Most ETF lending metrics peaked in March and declined thereafter but remain well above the January and February observations (including revenues, balances, fees and utilisation).
Fee-based revenue for government bond lending came in at $766 million for H1, an 11 percent YoY increase resulting from larger loan balances; H1 average fees declined YoY as a function of falling short in January and February. US treasuries returned $468 million for H1, a 29 percent increase.
For beneficial owners, returns from lending US treasury securities in 2020 have been substantially bolstered by reinvestment of cash collateral, however reinvestment returns have steadily trended lower since late March. Returns from lending European sovereigns were $228 million for H1, an 12 percent YoY decline as the result of both lower balances and fees, though spreads did widen in April and May which helped to offset declining balances.
Corporate bond lending revenues continue to fall short of 2019 comparison, mostly as the result of declining fees, however, balances have also declined YoY. H1 corporate lending returns came in at $226m, a 29 percent decline YoY.
Short sale bans, central bank support for credit and dividend cuts have dampened borrow demand in the first half of 2020. US equity specials are leading the way into the second half of the year, where the asset class runs into a much more challenging YoY comparison. The increased popularity of retail trading has reinforced the importance of that supply of hard to borrow shares, however utilisation and return to lendable are trending upward for agency lending of US equities as well. Challenges and opportunities abound heading into the second half of the year, close monitoring of results is warranted.
Figure 1
Global securities lending snapshot H1 2020
Figure 2
Global securities lending revenues
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