EXCLUSIVE: Brexit wounds—before the vote
28 June 2016 London
Image: Shutterstock
The UK’s marginal decision in favour of the so-called Brexit took the securities lending industry by surprise, according to DataLend.
In a research note on the market’s on-loan balances before and after the result, DataLend noted that it saw no indication from the securities lending market in the weeks prior to the vote that participants believed the UK was leaning toward an exit from the EU.
DataLend global product owner Nancy Allen and director Chris Benedict, who co-authored the research note, saw changes in equity loan balances and utilisations that are representative of expected seasonal trading patterns—“not an indication of pending market chaos”.
Europe ex-UK equity on-loan balances gradually came off at the beginning of June, from $185 billion down to $140 billion on 23 June, the day of the referendum vote.
Utilisation followed this pattern, dropping from 12.2 percent to 9.5 percent during the same timeframe. Fees to borrow these assets remained steady in June at 77 basis points (bps). UK equity borrowing patterns were similar.
“We saw a decrease in loan balances in early June from $46 billion down to $34 billion on 14 June, again due to normal trading patterns. After 14 June, we saw on loan values reverse course back up to $39 billion yesterday [27 June].”
“Utilisation percentages followed the same pattern. Fees to borrow UK equities traded between 48 and 52 bps during this time.”
In the fixed income world, on-loan balances for US treasuries averaged around $390 billion on loan in the weeks prior to the referendum, according to DataLend.
“What was particularly interesting with US treasury trading patterns was the cash-based rebate rate,” Allen and Benedict wrote. “In the days just prior to and after the referendum, the volume weighted average rebate one day on US treasuries increased significantly.”
“We saw the one-day rebate for US treasuries trading at around 45 bps for both 13 June and 14 June. On 22 June that rebate had risen to 49.13 bps. By the next day, the figure had reached 54.11 bps.”
“Once the results of the referendum were made public, the rebate jumped to a high of 73.33 bps, representing a very significant 63 percent increase in the one-day rebate rate from the beginning of the week. This increase suggests that dealers were seeking to raise cash as market turmoil set in and were willing to pay high rates to borrow that cash as they pledged US treasuries as collateral. However, we should also note that quarter-end pressures were also in effect.”
Despite the substantial market impact the referendum vote had on the GBP, even before the final result was announced, DataLend’s data did not reflect a big impact on demand for UK government bonds.
The on-loan balance for UK sovereigns has decreased since the beginning of June, falling from $62 billion to $58.2 billion as of 28 June, according to the report.
Utilisation for government bonds followed suit, dropping from 32 percent to 30 percent. Fees to borrow UK government bonds during this timeframe remained steady at 15.58 bps. The balances and spreads in German and French government bonds were fairly steady in the lead up to the vote, Allen and Benedict added.
In a research note on the market’s on-loan balances before and after the result, DataLend noted that it saw no indication from the securities lending market in the weeks prior to the vote that participants believed the UK was leaning toward an exit from the EU.
DataLend global product owner Nancy Allen and director Chris Benedict, who co-authored the research note, saw changes in equity loan balances and utilisations that are representative of expected seasonal trading patterns—“not an indication of pending market chaos”.
Europe ex-UK equity on-loan balances gradually came off at the beginning of June, from $185 billion down to $140 billion on 23 June, the day of the referendum vote.
Utilisation followed this pattern, dropping from 12.2 percent to 9.5 percent during the same timeframe. Fees to borrow these assets remained steady in June at 77 basis points (bps). UK equity borrowing patterns were similar.
“We saw a decrease in loan balances in early June from $46 billion down to $34 billion on 14 June, again due to normal trading patterns. After 14 June, we saw on loan values reverse course back up to $39 billion yesterday [27 June].”
“Utilisation percentages followed the same pattern. Fees to borrow UK equities traded between 48 and 52 bps during this time.”
In the fixed income world, on-loan balances for US treasuries averaged around $390 billion on loan in the weeks prior to the referendum, according to DataLend.
“What was particularly interesting with US treasury trading patterns was the cash-based rebate rate,” Allen and Benedict wrote. “In the days just prior to and after the referendum, the volume weighted average rebate one day on US treasuries increased significantly.”
“We saw the one-day rebate for US treasuries trading at around 45 bps for both 13 June and 14 June. On 22 June that rebate had risen to 49.13 bps. By the next day, the figure had reached 54.11 bps.”
“Once the results of the referendum were made public, the rebate jumped to a high of 73.33 bps, representing a very significant 63 percent increase in the one-day rebate rate from the beginning of the week. This increase suggests that dealers were seeking to raise cash as market turmoil set in and were willing to pay high rates to borrow that cash as they pledged US treasuries as collateral. However, we should also note that quarter-end pressures were also in effect.”
Despite the substantial market impact the referendum vote had on the GBP, even before the final result was announced, DataLend’s data did not reflect a big impact on demand for UK government bonds.
The on-loan balance for UK sovereigns has decreased since the beginning of June, falling from $62 billion to $58.2 billion as of 28 June, according to the report.
Utilisation for government bonds followed suit, dropping from 32 percent to 30 percent. Fees to borrow UK government bonds during this timeframe remained steady at 15.58 bps. The balances and spreads in German and French government bonds were fairly steady in the lead up to the vote, Allen and Benedict added.
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