Emerging trends in securities finance
03 September 2019
As summer comes to a close, DataLend鈥檚 product specialists, Keith Min and Matthew Ross, outline the trends that are currently emerging to see if the securities lending industry heated up along with the temperatures
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While overall revenue generated in the securities lending market continued its downward swing through June and July, a few areas bucked the trend in DataLend鈥檚 findings:
Hot securities back in focus
The first half of summer 2019 was not great for European and North American equity lending revenue, which dropped in June and July by 19 percent and 3 percent respectively, compared to the same period last year. However, the hard-to-borrow equities space, trading at 500+ basis points, experienced increases almost across the board, with loan balances and fees in European hard-to-borrows increasing by 19 percent and 13 percent respectively. That resulted in revenue returns of $116 million, which accounted for 40 percent of all equity revenue in the region over the period, up from 26 percent the previous year. North America saw an increase in hard-to-borrow loan balances and fees by 6 percent and 27 percent respectively. That led to revenue returns of $351 million, accounting for more than half of all equity revenue in the region (62 percent), up from 44 percent the previous year.
Asian ETFs gaining traction
June and July were not particularly good months for Asian equities either with a 23 percent revenue decrease, but not all instruments experienced the same downturn. In this period year over year, exchange traded funds (ETFs) in the region saw increases in the number of securities lent (up 54 percent), average on-loan value (up 52 percent) and revenue generated (up 50 percent). Japan and Hong Kong led the bulk of the activity, with index ETFs for the NIKKEI 225, FTSE A50, CSI 300 and TOPIX all trading within the 50 to 250 basis point (bps) fee range.
Sector highlights
With Applied Optoelectronics, Sunpower and Ubiquiti Networks all cooling from their 2018 peaks, the IT sector saw a substantial dip in average fee from 82 bps to 51 bps in the same period in 2019. However, loan balances in the sector increased by 19 percent year-on-year, leading up to pending acquisitions by both Fiserv and Fidelity National Information Services. The Energy sector also cooled dramatically, from 73 bps to 38 bps, with Tecnicas Reunidas and Diamond Offshore Drilling more recently trading just outside the general collateral range. For higher fees, one would have had to look at the Consumer Staples sector, where average fees doubled over the same period to 140 bps, led by newcomer Beyond Meat.
Sovereign debt update
While June and July 2019 witnessed slowing lending activity in global sovereign debt, resulting in revenue decreasing by 23 percent compared to the same period last year, Australian sovereign debt lending increased considerably. Balances rose 25 percent in those months amid rate cuts, leading to a 274 percent increase in lending revenue in this asset. Coincidentally, a similar trend seems to be emerging in US treasurys as balances have increased by 9 percent in the first three weeks of August, following the recent Federal Reserve rate cut.
The securities lending industry is showing progress in key areas, and with autumn just on the horizon, DataLend will continue to monitor where these trends lead and no doubt discover new ones along the way.
Hot securities back in focus
The first half of summer 2019 was not great for European and North American equity lending revenue, which dropped in June and July by 19 percent and 3 percent respectively, compared to the same period last year. However, the hard-to-borrow equities space, trading at 500+ basis points, experienced increases almost across the board, with loan balances and fees in European hard-to-borrows increasing by 19 percent and 13 percent respectively. That resulted in revenue returns of $116 million, which accounted for 40 percent of all equity revenue in the region over the period, up from 26 percent the previous year. North America saw an increase in hard-to-borrow loan balances and fees by 6 percent and 27 percent respectively. That led to revenue returns of $351 million, accounting for more than half of all equity revenue in the region (62 percent), up from 44 percent the previous year.
Asian ETFs gaining traction
June and July were not particularly good months for Asian equities either with a 23 percent revenue decrease, but not all instruments experienced the same downturn. In this period year over year, exchange traded funds (ETFs) in the region saw increases in the number of securities lent (up 54 percent), average on-loan value (up 52 percent) and revenue generated (up 50 percent). Japan and Hong Kong led the bulk of the activity, with index ETFs for the NIKKEI 225, FTSE A50, CSI 300 and TOPIX all trading within the 50 to 250 basis point (bps) fee range.
Sector highlights
With Applied Optoelectronics, Sunpower and Ubiquiti Networks all cooling from their 2018 peaks, the IT sector saw a substantial dip in average fee from 82 bps to 51 bps in the same period in 2019. However, loan balances in the sector increased by 19 percent year-on-year, leading up to pending acquisitions by both Fiserv and Fidelity National Information Services. The Energy sector also cooled dramatically, from 73 bps to 38 bps, with Tecnicas Reunidas and Diamond Offshore Drilling more recently trading just outside the general collateral range. For higher fees, one would have had to look at the Consumer Staples sector, where average fees doubled over the same period to 140 bps, led by newcomer Beyond Meat.
Sovereign debt update
While June and July 2019 witnessed slowing lending activity in global sovereign debt, resulting in revenue decreasing by 23 percent compared to the same period last year, Australian sovereign debt lending increased considerably. Balances rose 25 percent in those months amid rate cuts, leading to a 274 percent increase in lending revenue in this asset. Coincidentally, a similar trend seems to be emerging in US treasurys as balances have increased by 9 percent in the first three weeks of August, following the recent Federal Reserve rate cut.
The securities lending industry is showing progress in key areas, and with autumn just on the horizon, DataLend will continue to monitor where these trends lead and no doubt discover new ones along the way.
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