Blog: Securities Finance August Snapshot 2022 – IHS Markit

  • Securities finance revenues remain strong during
    August
  • Americas equity revenues increase 66% YoY
  • Corporate bonds experience strongest revenues of 2022
    yet again
  • ADR revenues start to recover

Despite August traditionally being a quiet month for securities
finance activity, global securities financing revenues hit
$1.139bln during the month. This was the highest
revenue generating month of the year after July set the previous
high of $1.125bln. Revenues increased 27% YoY across all asset
classes combined with double digit increases across the vast
majority of sectors. Asset classes to note when revenues are
compared with August 2021 are Americas Equities (+66% YoY), ADRs
(+88% YoY) and corporate bonds (+89% YoY).

Americas

As the Fed stated that monetary policy would be remaining tight
for “some time”, that they would be using their tools “forcefully”
and that “some pain would be inflicted” to deal with inflation,
equity markets were sent lower, after recent gains, leading to a
volatile trading environment throughout the month. The S&P 500
fell 4.2% towards the end of August bringing its YTD return to
-17.02%. Securities finance revenues offered a silver lining
however with a 66% increase YoY. Average balances were up 10% YoY,
average fees were up 51% YoY and average utilisation was up 16%
YoY. MoM the data was less impressive showing a decrease in monthly
revenues of 18% however.

As referenced throughout the month by the Securities Finance
Team via the S&P Market Intelligence
linkedin
page, the meme stock phenomenon made a return during
the month of August. BBBY, AMC and GME all featured heavily in the
press as the possibility of a renewed short squeeze due to an
increase in their share prices reappeared. Some of these stocks
appear in the top 10 highest revenue generating stocks for the
month of August. GME generated monthly revenues exceeding $40m,
producing more than $188m in securities financing revenues over the
course of 2022. Many of the other names in the top ten revenue
generators remained unchanged when compared to the previous months.
Automobile component companies, consumer services and the media and
entertainment sectors continued to dominate demand. The top ten
revenue generating stocks accounted for 33% of all Americas
revenues.

APAC equities

APAC equity revenues decreased 11% YoY but were down a modest 4%
when compared with July.

Taiwan was the top earning market once again generating $45m of
revenues which equates to 28% of all revenues for the region.
Taiwan continues to lead in the top ten revenue generator table as
well, as a new edition, Wiwynn Corp, became the top revenue
generating stock for August. Supply chain dislocations tied with
production issues (it takes an average of 26 weeks to make a
semiconductor) are keeping several Taiwanese stocks in the
“specials” space. This is reflected in utilisation figures which
show a 9.6% increase YoY.

Revenues in Japan increased by 7% YoY with average balances
remaining flat YoY. Average fees and utilisation also increased.
Investor sentiment improved in Japan during the month. This was
reflected by a rising stock market and a return to an inflationary
environment after years of deflation.

Australia generated 88% more revenue during August 2022 when
compared with August 2021. Mining and energy stocks are
particularly popular given the current energy crisis caused by the
boycott of Russian energy in Europe and the US. Average fees
increased an impressive 93% in this market which reflects the
strength of interest shown in borrowing Australian equities.

Other markets to note in the APAC region include South Korea and
Hong Kong. Revenues were down in both markets YoY. This is
reflective of the review of short selling activity in South Korea
and the fall in investor sentiment due to China’s zero COVID policy
in Hong Kong.

EMEA equities

Securities finance revenues in EMEA equities generated $102m
during the month of August. The highest revenues were generated by
German equities during the month, increasing 13% YoY. Norwegian and
Swedish equities were very much in focus throughout the month with
revenue increases of 198% and 137% respectively. Equinor Asa
contributed to 37% of Norway’s monthly revenues alone after a sharp
decrease in expected profits caused speculators to short the
stock.

Average balances saw notable increases across all EMEA markets
apart from Denmark, Spain, Switzerland, Italy and Belgium. Outside
of the Nordics, both Germany and France saw double digit increases
of 52% and 53% YoY respectively. Utilisation also hit 10.8% in
Germany and 8.5% in France as the economic impact of the European
energy crisis started to be reflected in the stock prices of the
largest companies, fuelling demand to borrow. Utilisation across
all EMEA markets increased 61% YoY. Average fees fell 3% YoY
however. Demand for European equities is increasing but given the
lack of widespread “specials” over the last few years, the increase
in demand is not yet translating into substantially higher revenues
and fees. Compared to July, revenues in the EMEA region remained
steady.

The top ten revenue generating stocks for the EMEA region
remained similar to those seen during July. There were new
additions from the insurance and energy sectors. Nn Group was a new
addition after a 12.1% fall in YoY profit figures due to the sale
of its asset management arm and insurance costs linked to a recent
storm in the Netherlands and Aegon, another Dutch insurer, was also
affected by the same insurance claims. The energy sector remains
under pressure due to higher gas and electricity prices spurred by
the cessation of Russian energy within the European countries.

ADRs

ADRs saw a recovery in revenues during the month of August.
Revenues increased 88% YoY and 25% MoM. Revenues for August of $40m
were the highest of 2022 so far. Revenues for the asset class have
been slowly increasing over the year with August doubling those of
January. In line with revenues, average fees at 1.67% were also the
highest of the year so far increasing 168% YoY and 28% MoM.

The top five revenue generating ADRs for the month of August
were dominated by Polestar and AMTD which accounted for 40% of all
revenues. Polestar remains under pressure from supply chain issues
and AMTD continues to be heavily borrowed as the stock remains in
its post-IPO lock up period.

With the expectation of an agreement this month between the US
and China regarding listing Chinese stocks on the NYSE, the demand
for ADRs is expected to increase as investors become less cautious
about investing in the sector and investment opportunities
increase.

ETPs

Securities finance revenues generated by ETPs, despite
increasing 18% YoY, suffered their worst month since January. Both
American and European ETFs showed strong increases in revenues YoY
and strong increases in Fees YoY, despite utilisation being down
across all regions. American ETPs continued to dominate the revenue
table producing 83% of all revenues.

The top revenue generators remain consistent with previous
months as the market volatility produced the same requirements for
both delta hedging and index shorts. Demand for HYG increased over
the month with revenues in this name alone increasing 41% when
compared with July.

Government Bonds

Interest rate policy continued to set the tone regarding the
shorting of short-dated government bonds as the asset class saw the
highest revenues of the year so far generating $156m during the
month. Average fees continued to increase YoY despite average
balances and utilisation being down. Short-dated UK Gilts and US
Treasuries saw the highest demand with the 3%July24 US Treasury
taking the top spot.

Demand for government bonds is expected to increase further
throughout the year due to the implementation of Phase 6 of UMR, a
general flight to quality as equity markets remain volatile and the
requirement by corporations to fulfil their growing collateral
requirements at CCP’s. An expected increase in demand coupled with
the steady increase in average rates should provide a favourable
backdrop for increasing revenues throughout the rest of 2022.

Corporate bonds

Corporate bonds experienced another pinnacle as monthly revenues
reached $87m. August was the highest revenue generating month for
the asset class so far this year. Demand continued to grow as
pressure on bond prices grew as interest rates increases became a
reality and calls for more aggressive rises gain traction. Those
companies that are low on liquidity or looking to refinance are
being actively shorted along with the non-investment grade and high
yield sectors more generally.

Revenues increased a whopping 89% YoY, balances were up 9%, fees
were up 73% and utilisation was up 26%. As demand for the asset
class has increased over the year so have average fees. Average
fees have increased 31% so far during 2022.

The top five revenue generating bonds contributed only 4% of all
revenues for the month. Booking Holdings was a new addition
following a disappointing earnings report.

Conclusion

Securities finance activity remained buoyant during August which
is traditionally seen to be a quieter month due to summer holidays
in the northern hemisphere. Revenues were on par with those
generated during the month of July which was the best month of 2022
so far. All regions improved in terms of revenue generation when
compared YoY. When compared with July, Government bonds and ADRs
saw increases in revenues throughout the month.

As market conditions remain volatile, securities finance
revenues are expected to remain strong. Further increases in loan
balances are expected and the pool of assets offering high fees and
high utilisation is predicted to grow.

As central bank policy around the world remains committed to
monetary tightening, corporate bonds are expected to remain
attractive to borrowers and equity markets are expected to remain
volatile. Despite inflationary pressures, company results remain
healthy. As long as this remains the case, quant, global macro and
arbitrage funds should continue to see value in borrowing stocks to
fulfil their trading strategies.


Posted 06 September 2022 by Matt Chessum, Director securities finance


IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.


This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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