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US equity special balances skyrocketed (and then pulled
back)
New record for ETP loan balances
Global securities finance revenues totaled $2.6bn for Q1 2021, a
15% YoY increase. Returns increased 11% sequentially, as compared
with Q4 2020. The new year came out of the gate at a sprint pace,
with the short squeeze in US equities and soaring borrow demand for
USTs. Growth in fixed income borrow demand extended to corporates
and exchange traded products as well. Global lendable assets
reached a record high in Q1, $30T, while loan balances reached a
post-GFC high of $2.7T.
APAC Equity
APAC equity finance revenues of $404m reflect a decline of 6%
YoY; however, the trend is upward, with March posting a YoY
increase of 4%. Daily average loan balances increased by 13% YoY
while narrower fee spreads dragged on returns. Asia equity special
balances averaged $8.7bn for Q1, an 11% YoY decline. The YoY
comparison is materially impacted by the South Korea short sale
ban, which is due to substantially conclude in May 2021. Compared
with Q4 2020, APAC special balances increased 37% in Q1, reflecting
a steady increase from the low point in November 2020. Special
balances are defined in this note as balances with a fee greater
than 500bps.
Depository Receipts
Revenues from lending American Depository Receipts (ADRs)
increased 279% YoY for Q1. Most of the increase was driven by Hong
Kong SAR domiciled Futu Holdings, which generated $191m in Q1, 66%
of the total ADR return. Excluding the impact of Futu, Q1 ADR
revenues increased 30% YoY. Depository receipts listed outside the
US generated $16m in Q1, a 74% YoY increase.
Americas Equity
Revenues for Americas equities came in at $996m for Q1, a 13%
YoY increase. Americas revenues declined 2% sequentially compared
with Q4 2020. The YoY revenue increase in aggregate was the result
of higher loan balances, though the quarterly aggregation belies
substantial variation by month. In January, average fees were up
32% compared with 2020, while loan balances were up 13%, both
reflecting the broad short squeeze for shares with elevated short
interest. For March, the decline in special balances weighed on
average fees by more than enough to offset the YoY increase in loan
balances. Americas specials balances averaged $15.5bn for Q1, a 56%
YoY increase, and 17% sequential increase compared with Q4
2020.
European Equity
European equity revenues came in at $294m for Q1, a 5% YoY
increase. Revenues declined 17% sequentially compared with Q4 2020.
The decline compared with Q4 2020 was impacted by the drop-off in
balances following the January short squeeze, most notably
including Varta Ag. EMEA specials balances averaged $3bn for Q1, a
22% YoY decline and 45% sequential decline compared with Q4
2020.
Exchange Traded Products
Global ETP revenues totaled $137m for Q1, the highest quarterly
revenue ever recorded, representing a 42% YoY increase. Loan
balances increased by 41% YoY, the largest contributor to revenue
growth; however, average fees also increased 6% YoY. Loan balances
reached a new all-time high on March 23rd, $102bn, with the final
uptick to the record driven by Penn National Gaming & Caeser's
Entertainment being added to the S&P 500. That narrowly edged
out the prior record set in December when Tesla was added to the
S&P 500. Fixed income products generated 27% of Q1 ETP
revenues, up from 18% for FY 2020.
Corporate Bonds
Corporate bond lending returns came in at $36.3m for Q1, a 17%
decline YoY. The YoY comparisons continue to be driven by narrower
fee spreads, with global loan balances with positive spreads
reaching a post-GFC record, $225bn, during the last week of the
quarter. Lendable assets reached an all-time high in December,
though declining valuations for investment grade corporates drove
lendable value lower in Q1.
Government Bonds
Government bond borrow demand remains robust, with nearly $1.2T
in average positive-fee global balances for Q1 reflecting a 20% YoY
increase. Revenues totaled $383m in Q1, a 4% YoY increase. US
government bond lending revenue came in at $230m for Q1, a 7% YoY
increase. The most revenue generating bond was the 10Y due Nov
2030, which saw substantially greater loan balances than prior 10Y
notes. The UST 10Y due Feb 2031 delivered a revenue uplift in
March, trading special for longer than prior issues, albeit with
lower loan balances than the Nov 2030 note.
Conclusion
If the year 2020 felt like a decade, Q1 2021 was a lifetime. The
short squeeze in January drove the most monthly equity finance
revenue on record for US equities. Equity special balances ended
the quarter well below the
January peak, however a positive a signal is found in the
relative underperformance of crowded US equity short positions in
February and March; Specials balances declining because the
trades are delivering alpha may boost future demand. Beyond
directional short demand, corporate actions and capital raising,
the latter including SPAC business combinations, are likely to
boost demand going forward, along with the resumption of dividends
halted or reduced in 2020 and the anticipated conclusion of the
remaining short sale bans. Trading in fixed income products picked
up with renewed vigor in Q1, as global growth expectations
ratcheted up substantially. Borrow demand for investment grade
credit also received a tailwind from the rates volatility. Varying
expectations about the course of action for the Federal Reserve,
inflation and economic growth appear likely to persist into the
remainder of 2021. Tying the themes together, as often they do,
exchange traded products saw soaring demand for credit, rates &
equities in a record setting quarter.
Posted 08 April 2021 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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