Q3 Securities lending soars in growth
12 November 2018 New York
Image: Shutterstock
Securities lending activity in Q3 this year delivered a total of $2.5 billion in revenue for financial services firms, the highest amount since the same quarter in 2008, according to a report by IHS Markit.
The revenue for the latest quarter was up 6 percent versus Q3 last year, and it was the highest since the $2.9 billion in revenue in the three months ended 30 September 2008, the report revealed.
Additionally, securities lending revenue in the first three quarters of this year totalled $8.3 billion, which marked the highest amount for the time period since Q3 2008, although the latest total is 27 percent less than the 2008 total.
Drawing on the results of the report, Sam Pierson, director, securities finance, IHS Markit, noted that the pickup in market volatility seen this year (after an anaemic 2017) has yielded a welcome uptrend in lending revenues this year.
He said: “The growth in industry revenues has been boosted this year by high-quality collateral needs, increased equity multiplier (EM) equity demand, particularly in Asia, demand for corporate bonds and some special situations for equity lending.”
The report also found that the lack of specials demand challenged US equity revenues, and the lack of specials balances hindered US equity lending revenue, which only equated to 38 percent of lending revenue for common shares in Q3, down from 45 percent of Q3 last year.
Similarly, in Asia, average balances with fees greater than 500bps fell to $8.6 billion in Q3, which was down from the average of $9.4 billion in Q1 this year. South Korea pushed against that trend, however, increasing average specials balances by $700 million in Q3 relative to H1.
Europe saw an increase in specials balances in Q3 relative to the first half of the year, Pierson noted that it was moving off a low base of $2.5 billion in H1, increasing to $2.8 billion in Q3.
Meanwhile, borrow demand for emerging market equities has been strong amid the underperformance of the asset class globally. The total lending revenue for global EM equities was $331 million in Q3.
Pierson commented: “Assuming present trends remain in place, global EM will have no difficulty moving past $1 billion in total revenue for 2018, which will mark the best year on record.”
Summarising the results of the report, he added: “9 October was the 10-year anniversary of the SEC ending the ban on short selling of US financial stocks; the 2.5-week tenure of which saw a 40 percent reduction in US equity loan balances.”
“Despite the decline in revenues in the last week of Q3 2008, it retains the title of most lending revenue on record for the third quarter. That highlights a key aspect of securities lending: revenues improve in down markets, helping to offset mark to market losses for beneficial owners.”
He added: “While less extreme, the improvement in securities lending revenues this year has helped to offset declining valuations in some sectors, most welcome for emerging market investors. With demand robust across asset classes, the uptrend in revenues doesn't show any signs of slowing down as we move through the fourth quarter of 2018 (though some more US equity specials wouldn't hurt!).”
The revenue for the latest quarter was up 6 percent versus Q3 last year, and it was the highest since the $2.9 billion in revenue in the three months ended 30 September 2008, the report revealed.
Additionally, securities lending revenue in the first three quarters of this year totalled $8.3 billion, which marked the highest amount for the time period since Q3 2008, although the latest total is 27 percent less than the 2008 total.
Drawing on the results of the report, Sam Pierson, director, securities finance, IHS Markit, noted that the pickup in market volatility seen this year (after an anaemic 2017) has yielded a welcome uptrend in lending revenues this year.
He said: “The growth in industry revenues has been boosted this year by high-quality collateral needs, increased equity multiplier (EM) equity demand, particularly in Asia, demand for corporate bonds and some special situations for equity lending.”
The report also found that the lack of specials demand challenged US equity revenues, and the lack of specials balances hindered US equity lending revenue, which only equated to 38 percent of lending revenue for common shares in Q3, down from 45 percent of Q3 last year.
Similarly, in Asia, average balances with fees greater than 500bps fell to $8.6 billion in Q3, which was down from the average of $9.4 billion in Q1 this year. South Korea pushed against that trend, however, increasing average specials balances by $700 million in Q3 relative to H1.
Europe saw an increase in specials balances in Q3 relative to the first half of the year, Pierson noted that it was moving off a low base of $2.5 billion in H1, increasing to $2.8 billion in Q3.
Meanwhile, borrow demand for emerging market equities has been strong amid the underperformance of the asset class globally. The total lending revenue for global EM equities was $331 million in Q3.
Pierson commented: “Assuming present trends remain in place, global EM will have no difficulty moving past $1 billion in total revenue for 2018, which will mark the best year on record.”
Summarising the results of the report, he added: “9 October was the 10-year anniversary of the SEC ending the ban on short selling of US financial stocks; the 2.5-week tenure of which saw a 40 percent reduction in US equity loan balances.”
“Despite the decline in revenues in the last week of Q3 2008, it retains the title of most lending revenue on record for the third quarter. That highlights a key aspect of securities lending: revenues improve in down markets, helping to offset mark to market losses for beneficial owners.”
He added: “While less extreme, the improvement in securities lending revenues this year has helped to offset declining valuations in some sectors, most welcome for emerging market investors. With demand robust across asset classes, the uptrend in revenues doesn't show any signs of slowing down as we move through the fourth quarter of 2018 (though some more US equity specials wouldn't hurt!).”
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