General

Securities Finance February 2022 Snapshot – IHS Markit

$825m in February securities finance revenue

  • February revenues climbed by 2% YoY
  • ADR borrow demand declined
  • Corporate bond borrow demand remains elevated
  • America’s equity revenues saw a respite from the continued
    slump

Global securities finance revenues totaled $825m in February, a
2% YoY rise. The YoY increase was primarily the result of
increasing balances, with most major categories showing YoY growth
apart from EMEA & ADRs. February did see a resurgence in
American equity spreads primarily driven by YoY growth in balances
even though the utilization remained flat. For the second
consecutive month, ADRs saw a YoY decline in revenues, loan
balances and fees in February. In this note, we will discuss the
drivers of February revenue.

APAC Equity

APAC Equity Finance revenues totaled $155m in February, up 25%
YoY. Taiwan and South Korea continued their bumper growth compared
to the same period last year, producing $45m (+172%) and $30m
(+365%) in February. However, compared to the prior month Taiwan
declined 8% and South Korea dropped 14%. Japan generated $34m in
February and moved back above South Korea. Average loan balances in
Japan increased to reach $127bn and utilization in APAC’s largest
equity market was 5.6%, up 14% YoY.

Kakaobank Corp retained the top spot for the 3rd month in a row
with $4.81m of revenue in February. Following its delisting from
the London Stock Exchange at the end of January there was still
revenue generated from BHP Group that helped boost overall revenues
in Australia. The other top revenue names were in Taiwan with
technology and semiconductor firms Au Optronics and Novatek
Microelectronics generating $2.27 and $1.68m, respectively.

Americas Equity

Americas Equity Finance generated $305m in February, a slight
uptick of 5% YoY. The decrease in average fees of -14% YoY was
buoyed by an increase of average balances of 22% YoY. America’s
revenues are still off the highs of last year but have reversed the
downward trend that started last November.

US and Canadian Equities revenue followed the same pattern with
increases of 5% and 2% YoY respectively, driven by increases in
average balances (21% & 33% YoY) and decreases in average fees
(-14% & -25% YoY).

Digital World Acquisition Corp (DWAC) and Lucid Group (LCID)
retained the top two spots on the chart in February but swapped
positions earning $26.1m and $18.22m respectively. Dutch Bros Inc
(BROS) hits the chart for the first time since its traditional IPO
back in September 2021. Average fees have increased over 400% MoM
to generate $10.4m in February in anticipation of the lock-up
expiry date in mid-March. Another gainer on the chart was Cassava
Sciences (SAVA) which generated $14.2m off continued pressure on
allegations of data manipulation although the FDA recently rejected
a petition to halt trials of their Alzheimer’s drug. Interest in
former SPAC name Ginkgo Bioworks (DNA) continues to increase with a
jump in borrow costs of 438% MoM to generate $12.1m for
February.

European Equity

The slow start to the year continues with European equity
revenues lagging at $74m, down 3% YoY and down 7.5% from the
previous month. Average loan balances are up 16% YoY to $229bn but,
aside from Switzerland and Spain, average fees of 0.42% declined
16% highlighting the impact of fee compression on revenue
opportunities in the region. The UK continues its slide to the 4th
spot with revenues of $8m, down 19% YoY. Switzerland climbed to the
3rd most revenue generating country with $9m in February, a 30%
increase YoY. Germany was on top with $14m of equity finance
revenue due to strong utilization of 6.5%, up 27% YoY. Norway
continues to demand the highest fees in Europe, delivering $6m in
February with Nel Asa (NEL NO) contributing 33% of the total
revenue.

Varta (VAR1) is still the top revenue generating stock in Europe
with $4.09m in February. Borrow demand for green energy stocks has
launched Nel Asa into the top 5 delivering $2.09m of revenue.

Depository Receipts

Revenues from lending American Depository Receipts (ADRs) saw a
steep drop of 88% YoY and 24% MoM, totaling $16m in February,
marking it as the lowest monthly revenue since October 2020. ADR
securities finance revenues were led by Up Fintech Holding (TIGR)
and United Microelectronics (UMC), a Chinese brokerage firm and a
Taiwanese semiconductor firm respectively. TIGR contributed 7% of
the ADR finance revenues with $1.04m for the month of February off
the cut in prime lending rates by Chinese government benefitting
tech stocks in that region. Loan balances for ADR’s decreased by
39% YoY, combined with narrower fee spreads (a 79% YoY fall),
contributed to the downswing in February revenue.

Exchange Traded Products

Global ETP in the securities lending market continue their
stellar performance, reaching an all-time-high revenue of $70m in
February, a 78% YoY increase. While numbers in January 2022 seemed
to slow down the uptrend noticed in H2 2021, the loan balance
increase in February, reaching $136bn, largely contributed to the
revenue generated this month. Lendable assets value decreased to
$480bn, down from $500bn registered in November 2021, which led to
a monthly-average utilization of 13.5%, up by 1% YoY.

The most revenue generating ETP continues to be the iShares
iBoxx $ High Yield Corporate Bond Fund (HYG), which returned $10.5m
in February. On the other hand, ARK Innovation Etf (ARKK)
maintained its strong performance, delivering $3.73m in revenues,
ranking as top equity exchange product earners and 3rd across all
ETP.

Corporate Bonds

Corporate bond lending revenues came in at $64m for February, a
102% YoY increase. The record level registered this month can be
attributed to the spike in both loan balances, up by 37% YoY, and
average fee spread increases to 0.29%, up by 48% YoY. The latter
suggests a stronger demand for HY bonds, even though levels are
still lower than the higher average fees registered at the
beginning of 2019. Lendable assets saw a slight decline in
February, down 2% YoY. This prompted the utilization to reach an
average of 5.5%, up by 32% YoY.

The Unibail-Rodamco-Westfield Se 2.87% perpetual note topped the
list of the top revenue names this month, generating $0.52m, down
11% MoM. On the other hand, American Airlines Group Inc 3.75% note
due March 2025 was the top earner for US Corporate Bonds, while
Mitsubishi Chemical Holdings Corp 0% note due March 2024 was 4th in
ranking globally and first for APAC Corporate Bonds.

Government Bonds

Fee-spread revenues of global sovereign debt lending totaled
$128m for February, a 12% YoY increase. Demand in government bonds
increased 11% YoY to $1.26T in positive-fee balances but was
slightly down 5% MoM. Average fees held steady at 0.13% for
February.

US government bond lending generated $63m, a 7% decrease YoY for
positive-fee balances driven by a 7% decline in average fees.
European debt lending generated $48.6m, slightly down MoM but up
35% YoY on the back of increases in both average fees (9% YoY) and
average balances (24% YoY)

Total government bond lending revenue for agency programs
including reinvestment returns and negative fee trades increased 7%
YoY as a result of a 7% YoY increase in intrinsic fee income and 7%
increase in reinvestment returns YoY. Average balances increased 3%
YoY and average borrow costs were up 4%.

Conclusion

Overall revenues increased by 2% in February, as global loan
balances continue to trend upward. The usage of exchange traded
products in institutional long portfolios and for short hedges has
resulted in record highs for lendable assets and loan balances,
respectively, with increased borrow demand likely to continue to
boost revenues going forward. The impending inflationary curbs led
to a trend reversal in the demand for US Treasuries, and similar
trends could be observed in the coming months in the EMEA region as
well with the inflationary drag exacerbated by the Russia-Ukraine
crisis. The ADR revenues declined by 88% YoY, the steepest drop
since October 2020, the dip driven by the collective decline in the
borrow demand of the top ADR revenue generators. Borrow demand for
corporate bonds continued last year’s trend, with February monthly
revenue seeing a YoY growth of over 102%.

Posted March 8, 2022 by Paul Wilson, Managing
Director, Securities Finance

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