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Global securities finance revenues totaled $853m in March, an
11% YoY increase. The YoY increase was primarily the result of
ADRs, ETFs and non-US equities. Average daily global revenues
decreased 5% MoM compared with February. The primary contributor to
the daily revenue shortfall in March was a continued decline in US
equity special balances. In this note, we will review revenue
drivers from March, which wrapped up the first quarter with $2.6bn
in revenue, a 15% YoY increase.
Americas Equity
Americas equity revenues came in at $230m for March, a 10% YoY
decline and a 28% decrease in average daily revenue compared with
February. The MoM decline was largely the result of declining
special balances, reflected in weighted average fees decreasing 31%
MoM, while loan balances increased by 4% MoM. Average fees went
from being up 32% YoY in January to -31% YoY in March.
US equity revenues came in at $198m for March, a 6% YoY decline.
US equity special balances declined by 45% MoM, with an average of
$7bn in March, following February's $13bn average, a far cry from
January's $25bn average. Special balances are defined in this note
as balances with a fee greater than 500bps.
The highest revenue generating US equity was Rocket Companies,
whose share price increased dramatically over the last couple days
of February and early March, subsequently declining to give back
much of the gains. As we have seen with other recent short
squeezes, fees for new borrows soared with the increased trading
volumes and on-loan values increased initially based on the share
price move. Like the share price, borrow demand and average fees
declined sharply over the subsequent week, resulting in 98% of
March revenue being generated during the first two weeks of the
month.
Canadian equity lending revenue of $30.5m reflected a 31% YoY
decline. The YoY decline was primarily driven by a 50% decline in
average fees, balances increased by 36% YoY. Average daily CA
equity revenue increased 22% MoM. Canadian equity specials balances
averaged $661m for March, an 8% increase compared with February and
the highest monthly average since September 2020.
APAC Equity
APAC equity finance revenues increased by 4% YoY in March, the
first YoY change in monthly revenue in more than 12 months. Average
daily revenues increased 11.6% compared with February, the fifth
consecutive month where daily returns increased MoM. Asia equity
special balances continue to have an upward trajectory from the
2020 low point in early November, however March's $8.6bn in daily
average special balances reflected a 7% decline compared with
February, remaining slightly above the January average.
The largest market, Japan equities, delivered $68m in March
revenues, a 7% YoY increase, resulting from increased loan
balances. Hong Kong equity finance revenues increased by 39% YoY in
March, however average daily returns fell slightly, breaking the
streak of five months with increasing daily average revenues set in
February. Apart from Malaysian firm Top Glove Corporation, HK
equities continue to own the top of the revenue generation leader
board. The short sale ban in South Korea continues to limit lending
revenue, with $6.5m in February revenue reflecting an 80% YoY
decline. South Korea's Financial Services Commission (FSC) has
extended its short selling ban until May 2nd, at which point
new short sales will be allowed for the benchmark Kospi 200 Index
and the small-cap Kosdaq 150.
Depository Receipts
Revenues from lending American Depository Receipts (ADRs)
increased 512% YoY. Most of the increase was driven by Hong Kong
SAR domiciled Futu Holdings, which generated $81m in March, 71% of
the total ADR return, down from 75% in February. Excluding the
impact of Futu, March ADR revenues increased 65% YoY.
Apart from Futu's impact on HK ADR revenues, ADRs for Mainland
Chinese firms also contributed to revenue growth in March, with
$17.5m in revenue reflecting an 161% YoY increase, however March
was particularly soft in 2020; total Q1 CN ADR revenues of $59m
reflect a 20% YoY increase. European ADRs delivered $6m in March
revenue, a 33% YoY decrease. Depository receipts listed outside the
US generated $5.6m in February, an 95% YoY increase.
European Equity
European equity returns increased by 12% YoY for March, with
$105m in monthly revenue, resulting from an increase in loan
balances. EMEA specials balances declined by 25% MoM, with March
special balances of $2.2bn. Former leading hard-to-borrow EMEA
equity Varta Ag saw borrow demand rebound in March and fees
increase slightly, remaining well below levels prior to the January
short squeeze.
Exchange Traded Products
Global ETP revenues totaled $62m for March, a 16% increase
compared with March 2020. Average ETP loan balances increased by
23% YoY. Loan balances reached a new all-time high on March 23rd,
taking the mantle from the prior record set in February. Revenues
for fixed income products more than doubled MoM, with $19.5m in
March revenue contributing 34% of the ETP total. Average daily
equity ETP revenues increased 42% MoM.
Corporate Bonds
Corporate bond lending returns came in at $36.3m for March, a 9%
decline YoY. The long-run decline in corporate bond lending
revenues, starting at the post-GFC peak return in late-2018,
continues to show signs of reversing course. Average daily revenues
in March increased 3.7% MoM. Average monthly loan balances extended
the climb from the 2020 low-point in September, $172bn, with March
average positive-fee balances of $222bn.
Government Bonds
Government bond borrow demand remains robust, with $1.2T in
positive-fee global balances for March reflecting an 18% YoY
increase. Revenues totaled $135m for March, a 7% YoY decline
compared with March 2020, the peak in sovereign debt fee spread
revenues last year. US government bond lending revenue came in at
$83m for March, an 10% YoY decrease. The most revenue generating
bond was the UST 10Y due Feb 2031, whose stellar $6.5m return in
March, resulting from elevated fees during the first two weeks of
the month. Returns from lending European sovereigns were $40m for
March, a 0.6% YoY decline.
Conclusion
Revenues for Q1 came in at $2.6bn, a 15% YoY increase. The
January blowout in crowded US equity short positions led to a
decline in special loan balances during the rest of Q1. While the
boom in SPAC issuance has slowed, the impacts for equity finance
may still be in an early phase, given how many business
combinations are possible over the remainder of 2021. Even if only
a small number of the several hundred outstanding SPACs find deals
in 2021, the revenue potential when an arbitrage opportunity opens
between the warrants and common shares can be massive. Even asset
classes which failed to generate YoY revenue growth have cause for
optimism, including the resumption of dividends and conclusion of
short sale bans for equities. For fixed income, US Treasury demand
has been strong, and varying expectations for growth and Fed policy
may continue to generate lending opportunities. One year on from
the bottom of the COVID-crash, YoY comparisons are favorable
regarding loan balances, and a number of catalysts are set to
support revenue growth. Directional short selling in hard-to-borrow
names may be supported by relative underperformance in February and
March, however the long shadow of January remains.
Posted 16 April 2021 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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