Positively growing
11 August 2015
What kind of a picture is publically available data painting?
Image: Shutterstock
The regulatory push for more transparency in the securities lending markets continues unabated. The Financial Stability Board is still working on its proposed standards and processes for global securities financing data collection and aggregation. While details of that reform are unclear, the EU Securities Financing Transactions Regulation, whose text was finally made public in June, certainly is, although by no means as much as many would like. Add to these the fact that the US Securities and Exchange Commission is collating comments on its own transparency proposal, and it’s obvious for the world to see that securities finance is going to be more open in the future.
Of course, market participants have embraced the need to make the business more transparent. Every securities finance conference is brimming with optimism about more clarity, in part because of the—many argue—unfair ‘shadow’ label used to describe the business. The more transparent securities finance becomes, the less it will have to defend itself, so the argument goes. It will be probably take years to have a full and complete picture of the markets, with data collection and aggregation being most useful when they can paint an historical picture. But, using what is publically available, how is securities finance faring at the moment?
The International Securities Lending Association (ISLA) has been active in assessing securities finance, finding that €1.7 trillion of securities were on-loan globally as 31 December 2014, drawn from an available lending pool of €12.5 trillion.
This represents a growth of some 18 percent in reported on-loan balances during 2014, according to the second edition of the ISLA’s Securities Lending Report, which aims to provide policymakers with accurate industry statistics. As of 31 December 2014, ISLA found that institutional investors such as pension funds, mutual funds and sovereign wealth funds, remained the largest participants in the securities lending market.
Banks’ securities lending, when acting as principal, represented 23 percent of the market, up from 18 percent in June 2014. Fifty-two percent of all outstanding loans were of equities or exchange-traded funds, which was broadly the same as at 30 June.
The ISLA report has also shown that government bond lending represented 38 percent of the total global on-loan balances by year-end 2014, up from 35 percent at 30 June, with both the supply and demand to borrow government bonds increasing during 2014.
The report stated: “The split between non-cash and cash collateral received by lenders was broadly 55/45 with a clear and ongoing drift away from cash collateral.”
“In certain markets such as government bond lending this trend was more extreme with, for example, only 10 percent of loans of European government bonds being booked as cash collateral loans.”
More recently, DataLend compiled an infographic that showed the value of available inventory stands at $13.22 trillion, as 22 June.
Of the available inventory worldwide, $1.72 trillion was out on loan as of 22 June. The value of equity on loan was $851 billion, while fixed income on loan stood at $876 billion. Some 41,673 unique securities were out on loan, according to the infographic, yielding an estimated gross revenue of $19.2 million per day on average, which equates to $2.26 billion for the first half of 2015.
Utilisation has continued to remain below past peaks, with the US seeing 13 percent of available securities utilised, Europe 14 percent and the Asia Pacific 10 percent. Despite this split in favour of Europe, the US is still the largest market with $954 billion out on loan as of 22 June. Canada is the closest market in size, with an estimated $131 billion of securities out on loan.
The US also commands a fee of 38 basis points (volume-weighted average, year to date), whereas Hong Kong, which has $28.8 billion out on loan, yields fees of 210 basis points, according to DataLend.
Recent financial results from the agent lenders that make their securities lending revenues public have largely been positive, with BNY Mellon earning seasonally higher securities revenue of $40 million during Q2 2015.
Securities lending revenue was higher during the last quarter than Q1 2015, when the bank earned $34 million. It was also up on Q2 2014, by $5 million. Asset servicing fees earned overall during Q2 2015 hit $1.1 billion, an increase of 4 percent year-over-year and 2 percent sequentially.
BNY Mellon explained in its earnings report: “The year-over-year increase primarily reflects organic growth, due in part to global collateral services, net new business and higher market values, partially offset by the unfavourable impact of a stronger US dollar. The sequential increase primarily reflects organic growth and seasonally higher securities lending revenue.”
Financing-related fees, meanwhile, were $58 million in Q2 2015 compared with $44 million in Q2 2014 and $40 million in the first quarter of this year. “Both increases primarily reflect higher fees related to secured intra-day credit provided to dealers in connection with their triparty repo activity,” said the bank.
Similarly, State Street revealed increases in its securities finance revenue, reaching $155 million in Q2 2015.
The result represents an increase of $54 million, or 53.5 percent, compared to Q1, a jump that was primarily attributed to seasonality. It is also saw an increase of 5.4 percent compared to Q2 2014.
This was attributed to new business from enhanced custody, but was partially offset by lower spreads.
At BlackRock, investment advisory, administration fees and securities lending revenue increased $100 million from Q2 2014, thanks to organic growth and market appreciation, which outpaced the impact of foreign exchange movements. On its own, securities lending fees of $147 million in Q2 2015 showed an increase of $7 million over the same quarter in 2014.
Investment advisory, administration fees and securities lending revenue increased $144 million from Q1 2015, reflecting organic base fee growth, the effect of one additional revenue day in the quarter and seasonally higher securities lending fees, which increased $33 million from Q1 2015.
Northern Trust did see securities lending dip 11 percent during Q2 2015 due to changes in fee arrangements, although that was in comparison to the same quarter in 2014.
Quarter-over-quarter, the bank earned higher revenue, collecting $26.8 million in fees and beating Q1 2015’s figure of $21.6 million. “Securities lending increased 24 percent, reflecting higher spreads in the current quarter,” explained Northern Trust.
On the prime services side, BNP Paribas saw significant increases in revenues in Q2 2015.
Revenues increased to over €3 billion, a 15.6 percent increase compared to Q2 2014, which reached €2.64 billion. Equity and prime services revenue increased 22.2 percent compared to Q2 2014, reaching €621 million. The increases were again attributed mainly to a generally favourable environment in the global and equity markets.
These results are but a snapshot, yet they point to the wider business going well, in the face of the biggest regulatory upheaval in decades. Discussions with industry executives are similarly positive, with BNP Paribas’s new US business growing rapidly and reports indicating that equity financing is booming across the Atlantic, too. While regulators push for more transparency from market participants, the going seems to be good.
Of course, market participants have embraced the need to make the business more transparent. Every securities finance conference is brimming with optimism about more clarity, in part because of the—many argue—unfair ‘shadow’ label used to describe the business. The more transparent securities finance becomes, the less it will have to defend itself, so the argument goes. It will be probably take years to have a full and complete picture of the markets, with data collection and aggregation being most useful when they can paint an historical picture. But, using what is publically available, how is securities finance faring at the moment?
The International Securities Lending Association (ISLA) has been active in assessing securities finance, finding that €1.7 trillion of securities were on-loan globally as 31 December 2014, drawn from an available lending pool of €12.5 trillion.
This represents a growth of some 18 percent in reported on-loan balances during 2014, according to the second edition of the ISLA’s Securities Lending Report, which aims to provide policymakers with accurate industry statistics. As of 31 December 2014, ISLA found that institutional investors such as pension funds, mutual funds and sovereign wealth funds, remained the largest participants in the securities lending market.
Banks’ securities lending, when acting as principal, represented 23 percent of the market, up from 18 percent in June 2014. Fifty-two percent of all outstanding loans were of equities or exchange-traded funds, which was broadly the same as at 30 June.
The ISLA report has also shown that government bond lending represented 38 percent of the total global on-loan balances by year-end 2014, up from 35 percent at 30 June, with both the supply and demand to borrow government bonds increasing during 2014.
The report stated: “The split between non-cash and cash collateral received by lenders was broadly 55/45 with a clear and ongoing drift away from cash collateral.”
“In certain markets such as government bond lending this trend was more extreme with, for example, only 10 percent of loans of European government bonds being booked as cash collateral loans.”
More recently, DataLend compiled an infographic that showed the value of available inventory stands at $13.22 trillion, as 22 June.
Of the available inventory worldwide, $1.72 trillion was out on loan as of 22 June. The value of equity on loan was $851 billion, while fixed income on loan stood at $876 billion. Some 41,673 unique securities were out on loan, according to the infographic, yielding an estimated gross revenue of $19.2 million per day on average, which equates to $2.26 billion for the first half of 2015.
Utilisation has continued to remain below past peaks, with the US seeing 13 percent of available securities utilised, Europe 14 percent and the Asia Pacific 10 percent. Despite this split in favour of Europe, the US is still the largest market with $954 billion out on loan as of 22 June. Canada is the closest market in size, with an estimated $131 billion of securities out on loan.
The US also commands a fee of 38 basis points (volume-weighted average, year to date), whereas Hong Kong, which has $28.8 billion out on loan, yields fees of 210 basis points, according to DataLend.
Recent financial results from the agent lenders that make their securities lending revenues public have largely been positive, with BNY Mellon earning seasonally higher securities revenue of $40 million during Q2 2015.
Securities lending revenue was higher during the last quarter than Q1 2015, when the bank earned $34 million. It was also up on Q2 2014, by $5 million. Asset servicing fees earned overall during Q2 2015 hit $1.1 billion, an increase of 4 percent year-over-year and 2 percent sequentially.
BNY Mellon explained in its earnings report: “The year-over-year increase primarily reflects organic growth, due in part to global collateral services, net new business and higher market values, partially offset by the unfavourable impact of a stronger US dollar. The sequential increase primarily reflects organic growth and seasonally higher securities lending revenue.”
Financing-related fees, meanwhile, were $58 million in Q2 2015 compared with $44 million in Q2 2014 and $40 million in the first quarter of this year. “Both increases primarily reflect higher fees related to secured intra-day credit provided to dealers in connection with their triparty repo activity,” said the bank.
Similarly, State Street revealed increases in its securities finance revenue, reaching $155 million in Q2 2015.
The result represents an increase of $54 million, or 53.5 percent, compared to Q1, a jump that was primarily attributed to seasonality. It is also saw an increase of 5.4 percent compared to Q2 2014.
This was attributed to new business from enhanced custody, but was partially offset by lower spreads.
At BlackRock, investment advisory, administration fees and securities lending revenue increased $100 million from Q2 2014, thanks to organic growth and market appreciation, which outpaced the impact of foreign exchange movements. On its own, securities lending fees of $147 million in Q2 2015 showed an increase of $7 million over the same quarter in 2014.
Investment advisory, administration fees and securities lending revenue increased $144 million from Q1 2015, reflecting organic base fee growth, the effect of one additional revenue day in the quarter and seasonally higher securities lending fees, which increased $33 million from Q1 2015.
Northern Trust did see securities lending dip 11 percent during Q2 2015 due to changes in fee arrangements, although that was in comparison to the same quarter in 2014.
Quarter-over-quarter, the bank earned higher revenue, collecting $26.8 million in fees and beating Q1 2015’s figure of $21.6 million. “Securities lending increased 24 percent, reflecting higher spreads in the current quarter,” explained Northern Trust.
On the prime services side, BNP Paribas saw significant increases in revenues in Q2 2015.
Revenues increased to over €3 billion, a 15.6 percent increase compared to Q2 2014, which reached €2.64 billion. Equity and prime services revenue increased 22.2 percent compared to Q2 2014, reaching €621 million. The increases were again attributed mainly to a generally favourable environment in the global and equity markets.
These results are but a snapshot, yet they point to the wider business going well, in the face of the biggest regulatory upheaval in decades. Discussions with industry executives are similarly positive, with BNP Paribas’s new US business growing rapidly and reports indicating that equity financing is booming across the Atlantic, too. While regulators push for more transparency from market participants, the going seems to be good.
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