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Global securities finance revenue surpassed $5.5b in the first
half of 2021, an increase of 14% YoY. The YoY comparison with the
first half of 2020 generally reflects increased balances and
narrower fee spreads. Partly the comparison with H1 2020 is the
result of lower equity values amid the COVID-related volatility.
There are some significant exceptions including APAC equities,
depository receipts and exchange traded products which all saw a
YoY increase in average fees. US equity special balances varied
widely in H1, while a lack of specials partially offset a recovery
in EMEA equity finance revenues relating to dividend reinstatement.
Fixed income returns from fee spreads were broadly like 2020 as a
result of increased balances and narrower spreads, however
reinvestment returns were much more like 2019 than the stellar
return observed around the rate cuts in 2020.
US equity revenues came in at $1.9bn for the first half of 2021,
an increase of 16.5% YoY. The revenue increase was driven by a 28%
YoY increase in loan balances, which more than offset the 9%
reduction in average fees YTD. Nine percent of H1 US equity finance
revenues were delivered by conventional IPOs which occurred in
2020, a slight reduction from the first half of 2020 when the 2019
class of IPOs delivered 9.7% of revenues. A starker YoY change was
observed for US SPAC IPOs, where the 2020 class delivered 11% of H1
2021 revenues, where the 2019 class generated 0.1% of H1 2020
returns. Apart from borrow demand driven by IPOs around warrant
redemptions and lockup expiries, the recurring broad squeezes in
crowded US equity short positions have created lucrative lending
opportunities. The squeeze at the end of January appeared at the
time to be a coda to the outperformance of crowded shorts which
started in April 2020, and the rest of Q1 was indeed rather
subdued, however a few IPO/SPAC trades and another broad short
squeeze in June saw US equity special balances resurgent toward the
end of Q2.
Canadian equity lending revenues increased over the course of
H1, but remain well below historical trend, largely the result of
less Cannabis related loan balances. H1 revenues of $160m reflect a
44% YoY decline, the result of a 55% decline in average fees,
despite a 27% YoY increase in loan balances.
Equity lending in Europe rebounded relative to 2020 but remained
27% below the 2019 level; H1 revenues of $793m reflect a 12% YoY
increase. Part of the increase was due to reinstated dividends
which boosted borrow demand, particularly for French equities,
however the YoY comparison is complicated by some 2020 dividends
which were delayed into July. EMEA equity specials, particularly in
Germany, delivered substantial returns over the last half of 2020
however following the January short specials balances declined
sharply; Q2 did see a pickup with stalwart contributors Varta Ag
& Tui Ag seeing increased borrow demand.
Asia equity lending revenues have steadily trended higher from
the 2020 low point in November, with the trend gaining momentum in
Q2 after the short sale ban in South Korea was mostly lifted. H1
2021 revenues of $880m reflect an 8.7% YoY increase. Hong Kong SAR
equity finance revenues have consistently shown YoY growth since
May of 2020, producing 8 of the top 10 APAC revenue generators
during H1. Taiwanese equity finance revenues increased steadily
YTD, particularly in Q2, as special balances increased. Malaysia
equity revenues surged largely on the back of Top Glove Corporation
Bhd, the most revenue generating APAC security in H1. Australian
equity revenues totalled $52m in H1, a 16% YoY increase.
Global exchange traded product (ETP) revenues were $310m for H1,
a 53% YoY increase. The stellar return had several drivers, the
most notable was an increase in average fees for fixed income
products. Fixed income products generated 34% of H1 returns, up
from 22% in the first half of 2020. Ark Invest funds made a splash
atop the most revenue generating product table with two funds
amongst the top 10 for H1. Other products leading H1 revenue
include emerging markets, particularly China-focused, and US equity
indices. Products listed in the US generated $239m, an increase of
72% YoY, while non-US listed products generated $71m in H1, an
increase of 12% YoY.
Depository receipts were an emergent asset class for lenders in
H1, with surging fees for Hong Kong SAR firm Futu Holdings ADR
listed on NASDAQ making it the most revenue generating security
globally for H1 2021. Apart from Futu global depository, receipt
revenues grew by 56% YoY, with the largest contributor being
Chinese ADRs.
Fixed income lending via agency programs declined YoY as a
result of lower returns on cash collateral generated, as compared
with the period following the Q1 2020 interest rate cut. Total
agency fixed income revenues declined by 14% YoY for H1 2021, the
result of reinvestment revenue declining by 42% to $397m while fee
spread revenue increased by 21% YoY, to $641m. The increase in
revenue from lending fees is partly driven by a reduction in trades
with negative intrinsic fee. For comparison, H1 2020 global fixed
income agency lending revenues totalled $1.2b, the result of $678m
of income from reinvestment of cash collateral and $530m in
intrinsic spread income.
Total fee-based revenue for government bond lending came in at
$787m for H1, a 1.2% YoY increase resulting from a 20% decline in
average fees and a 27% increase in average on-loan balances. In Q1
some of the increased borrow demand for US Treasuries and
investment grade credit was likely tied to trades regarding rate
path and yield curve shape, which may have started to unwind in the
2nd quarter. US Treasuries returned $460m for H1, a 3.2% YoY
decline. Canadian government debt returned $53.9m for H1, a 2.9%
YoY increase. Returns from lending European sovereigns were $254m
for H1, an 10% YoY increase, with Germany and France the largest
contributors.
H1 corporate bond finance revenues came in at $225m, a 2.1%
decline YoY. Loan balances steadily increased during H1 through May
and trailed off a little in June; H1 average loan balances
increased 21% YoY while average fees decreased by 19%. Part of the
decrease in fees was the result of a lack of hard to borrow issues
commanding additional return as compared with H1 2020. Revenues for
investment grade corporates increased by 1% YoY, while revenues for
non-investment grade and unrated corporates declined by 7% YoY.
Conclusion:
Global H1 revenues were the highest since 2018 on a variety of
drivers including SPACs, squeezes, exchange traded products, ADRs
and interest rate volatility. H1 was generally positive for global
equity markets and financing activity relating to capital raising
appear likely to persist into the second half of the year. APAC
equity finance revenue has resurged after declining sharply amid
short sale bans in 2020. Fixed income borrow demand is historically
high, however interest rate declines may dent future borrow demand.
Taken together, the drivers for equity borrow demand that were
anticipated coming into 2021 are playing out, while some asset
classes including ADR's and exchange traded products have exceeded
expectations based on historical trends. While summer is often a
slow period for capital markets, 2020 was particularly slow in
August with a dearth of hard to borrow equities or corporate
actions driving financing revenues; Following that slow period
revenues increased steadily through Q4 for most asset classes
globally. The 2nd half of 2021 has some compelling drivers at the
outset including IPOs lockup expirations, the likelihood that many
outstanding SPACs will seek business combinations, increasing
borrow demand for EM APAC equities and historically high fixed
income on-loan balances.
Posted 03 August 2021 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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