Securities Finance September Snapshot 2023 (2024)

EQUITIES COMMENTARY Oct 03, 2023

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• Securities lending revenues fall below the $1B mark for thefirst time this year
• Q3 revenues of $3.13B generated, a decline of 7.5% YoY
• Specials revenues across US equities decline MoM by 61%MoM
• APAC is the only region to see YoY growth in revenues(+26%)

Securities lending activity generated $896M inrevenues during the month of September. This is the lowest revenuegenerating month of the year so far and the first time during 2023that revenues have fallen below the $1B per month mark. September'srevenues were also the lowest seen since October 2022. As can beseen from the table above, most asset classes experienced YoYdeclines in revenues, balances, fees, and utilization during themonth. In the equity markets, the only region to see any revenuegrowth was the APAC region. EMEA equity revenues continued todecline, and Americas equities returns fell following a substantialdecline in specials revenues.

Across the fixed income markets, despite a 3% YoY increase incorporate bond revenues ($86M), monthly returns were lower thanthose seen during previous months. Many market participants mayhave become accustomed to seeing double digit increases and monthlyreturns that are closer to the $100M mark across the asset classsince the beginning of the year. Government bonds experienced a 10%decline in revenues YoY along with a fall in average fees,utilization, and balances.

The third quarter of the year was slightly disappointing forsecurities lending markets when compared on a YoY basis. During Q3,$3.13B in revenues were generated for securitieslending participants which is a 7.5% decline when compared with Q32022. Average fees across all equities fell to 49bps (-1% YoY)which is lower than during both Q1 (53bps) and Q2 (56bps). Averagebalances for the Q3 period also declined YoY (-9%) as didutilization (-17%). Lendable increased by 8% over Q3 2022, however.Despite the decline in revenues and general borrowing activityduring the quarter, given the strong start to the year, on a YTDbasis, annual revenues are still trending 7% higher than at thesame point during 2022.

Americas Equities

September bucked the trend for financial markets in the US withthe major stock markets seeing their first declines in many months.During September the S&P500 fell by 4.85%, the Nasdaq was down5.36%, the Dow Jones fell by 3.97% and the TSX 60 in Canadadeclined by 3.53%. During the month US treasury yields reachedhighs not experienced since pre-financial crisis as the Federalreserved repeated their calls for higher interest rates for longer.As a result, a sell off was seen in the US equity markets asinvestors preferred the comfort of higher yielding Treasuries overmany of the growth stocks that have been experiencing the recentstock price increases.

September was by far the worst month of the year so far for USequity markets with autoworkers on strike, a looming governmentshutdown and rising energy prices, all providing new pressurepoints across the US economy and potentially challenging the ideaof a soft landing following the US Federal reserve's war oninflation. It appears that the Fed's restrictive monetary policy isfinally starting to bite in the US and consumers are starting tofeel the pinch.

Over the third quarter, the S&P 500 posted a 3.7% decline,its first negative quarter in a year. Meanwhile, the NasdaqComposite ended the quarter down 4.1%, its biggest quarterlydecline since Q2 of last year.

During the month of September, Americas equities generated $276min securities lending revenues. This was the lowest monthly revenuenumber YTD and the lowest seen since January 2022. Daily revenuesdipped below the $10m a day mark throughout the month as a sharpdecline in average fees was experienced from the end of Augustonwards. Average fees hit their lowest monthly level of the year sofar, standing at 54bps, which represents a decline of 18% YoY and42% MoM. Average fees were also the lowest seen since January 2022.A fall in balances was experienced throughout the month, alsoreaching their lowest level of 2023 so far and hitting a multiyearlow (lowest since May 2021) ($627B) with an 11% decline YoY and a3% decline MoM. Utilization fell to 2.73% over the month, falling19% YoY and 2% MoM, remaining significantly under the 3.2% averageseen during 2022.

Over the quarter, securities lending revenues of $1.295B weregenerated by Americas equities which is 13% lower YoY (Q3 2022$1.492B). Despite the decline YoY, revenues for Q3 still remainsignificantly higher than those seen during previous years (Q3 2021$890M, Q3 2020 $880M). Revenues were lower during every month of Q3when compared with 2022, with September experiencing the largestdecline (July -15%, August -1% and September -27%). A reduction inbalances took place throughout the quarter but lendable valuesincreased. Q3 lendable values were 9% higher YoY, increasing by$900M between Q2 and Q3. As a result, average utilization dipped toits lowest quarterly average of 2023 (2.77%).

Specials activity for US equities experienced its lowest revenuegenerating month since April 2021 ($117M) during September.Following the completion of the AMC / APE share conversion and theJNJ / KNVU spin off, specials revenues declined by 61% MoM (Aug$376M) and 38% YoY. The significant decline in specials revenuesappears to be the principal driver behind the sharp decline inmonthly revenues across the region depicting how important theseopportunities have been in supporting revenues across Americasequities over the year. In the US, the percentage of revenue beinggenerated from specials activity fell to 63.5% during Septemberfrom 79% during August. The proportion of balances linked tospecials activity also declined both YoY and MoM (August 3.2%).

Across Canada, specials activity increased YoY (+2.4%) butdeclined MoM (-4%). The percentage of revenues derived fromspecials activity decreased from 23% during August to 19.4% duringSeptember. YTD specials revenues are 18% higher than at the samepoint during 2022 ($67.86M).

As discussed, the decline in specials activity can be seen inthe revenue numbers shown in the US top ten revenue generator list.For the first time this year, no one stock has generated doubledigit revenues during the month. Many of the names in the list arereoccurring stocks. Vinfast Auto Ltd (VFS) is aSPAC that was for a short period, one of the world's hotteststocks, as its market valuation soared. The rapid increase in priceled to an increase in stock on loan as investors remained cautiousof the company's valuation.

Cava Group Inc (CAVA), the Mediterranean-themed restaurantchain, is the only new addition to the table throughout the month.This company recently completed its initial public offering in Juneand was the first restaurant chain to go public since SweetgreenInc (SG), another well-known short from 2022, issued shares duringlate 2021. The company remains loss making but is showingimpressive growth rates leading some investors to believe that thecompany may soon run out of cash.

Across Canada, the energy and banking sector remained in focuswith the arrival of third quarter dividends. Canopy Growth Corp(WEED), a producer, distributor and seller of cannabis entered thetop ten revenue generator table. Liquidity in this stock within thesecurities lending market remains tight with active utilization inthe stock showing 100%, which continues to push average feeshigher.

APAC equities

Stock markets across the Asia Pacific region followed those inthe US lower during the month with the ASX 200 down 3.15%, the HengSeng down 3.65% and the CSI 300 down 2.65%. The Nikkei 225, whichhas increased by over 22% so far this year, also lost some of theprevious month's gains with a decline of 2.61% over the month. Yenweakness, Chinese economic data and possible contagion from thestruggles being played out in the Chinese property sector continuedto dominate the headlines in the region. In South Korea, the emergence of some meme stocks continued tokeep the regulators interested in the securities lending marketsand a diplomatic row between Canada and India kept geopoliticalrisk at the forefront of investors' minds.

In the securities lending markets, the Asia Pacific region wasthe best performing region globally during the month, postingincreases in revenues (+26%), balances (+8%) and average fees(+16%) when compared YoY. Revenues of $225M were generated duringthe month, making September the highest revenue generating month ofthe year so far. Strong increases were seen in both South Korea(+138%) and Malaysia (+93%) YoY, with only Australia and Thailandseeing decreases in revenues during the month. In Hong Kong,revenues also experienced strong increases (+23% YoY and 10% MoM).Average fees have continued to grow in Hong Kong over the year withSeptember posting their highest-level YTD (180bps). The growth inaverage fees is responsible for the increase seen in revenuesthroughout the year as balances continue to decline and utilizationremains 9% lower YoY (3.96%).

South Korea was the standout market during the month as stronggrowth in both revenues and average fees pushed the market tosecond place after Japan (in terms of revenue generation). Interestin the market has grown significantly over the year with balancesincreasing by over 60% since January. Utilization now also exceeds7% having started the year just below 5%. This is one of the onlymarkets globally to see an increase in utilization since thebeginning of the year.

During the quarter, APAC equities generated $605.4M, making Q3the best performing quarter of 2023 so far (Q1 $512.97M, Q2$524.9M). Average fees increased by 11% YoY to 106bps, bututilization declined 5% YoY to 5.22%. Taiwan ($148.3M), South Korea($141M) and Malaysia ($5.9m) all experienced their strongestquarter of 2023 so far in relation to revenue generation.

APAC specials revenues increased by 49% YoY to $109.5M, makingSeptember the highest revenue generating month for specialsactivity since March 2019 ($109.78M). Specials revenues YTD of$780.7M currently places 2023 as the best performing year forspecials revenues YTD since at least 2008 (+10% YoY). Theproportion of overall revenues that were generated by specialsactivity was 49%. These revenues were generated from a decreasingproportion of the on-loan balance (5.9% Sep vs 6.7% Aug).

The top ten revenue generators accounted for 20% of the regionsrevenues during the month. South Korea dominated the table withfour out of the top ten stocks listed in the country. Concerns inthe Chinese property sector increased borrowing in Country GardenHoldings Co Ltd (2007) and Sunac China Holdings Ltd (1918) duringthe month. Sunac recently sought chapter 15 protection in a NewYork bankruptcy court as it looks to restructure $9B of debts. Asmentioned in previous snapshots Gigabyte Technology Co Ltd (2376)continued to see the percentage of its shares outstanding on loanincrease during the month with utilization surpassing 80% towardsthe end of the month as its share price remains volatile as thecompany's profit margins continue to decline.

EMEA equities

Eurozone inflation reached its lowest point in nearly two yearsduring the month of September, offering optimism that the recentsurge in consumer prices is abating and potentially paving the wayfor the European Central Bank to halt interest rate hikes.Stagflation concerns remain high across Europe and continue toweigh heavily on investors minds. Across Europe the global sell offin equity markets continued with the CAC 40 falling 3.2%, the DAXdown 3.4% and the Eurostoxx 600 declining 3.51%. The UK's FTSE100was one of the only world stock markets to increase throughout themonth as oil traded close to $100 a barrel for the first time sinceearly May benefiting the large cap petroleum companies listed inthe country's benchmark index.

During the month revenues generated by European equitiescontinued to decline. $61.4M was generated during the month makingSeptember one of the lowest revenue generating months for EMEAequities for many years. Revenues declined by 32% YoY and 13% MoM.Average fees declined 4% YoY to 45bps marking the lowest averagefee since February 2022 (42bps). Balances continued to decline,again, marking their lowest level for many years (-29% YoY, -4%MoM) whilst lendable values increased by 14% YoY. This combinationpushed average utilization to 3.84%, another multi-year low.

All markets performed relatively poorly over the month, allexperiencing double digit declines except for the relatively lowrevenue generating markets of Denmark (+18%) and the Netherlands(+72%). The Netherlands was the standout market over the month withYoY revenue increases of 72%. Just under 50% of these revenues wereoriginated from one stock, NN Group NV (NN). Average fees increasedacross German equities over the month (+16%) to 49bps. Thisrepresents their lowest level since January however (43bps). Asimilar picture was seen in the UK where average fees declined to25bps (-37% YoY, -14% MoM). Revenues in the UK also hit multi-yearlows despite continual increases in lendable inventories.

Over the quarter, EMEA equities generated $223.3M. This was 25%lower than during Q3 2022. YTD revenues for EMEA equities are 20%lower when compared with 2022 despite a Q3 average fee of 50bps(+2% YoY). A sharp decline in balances (-27% YoY) coupled with a12% YoY increase in lendable supply has pushed Q3 utilization to amultiyear quarterly low of 3.95%.

In the specials market, revenues declined to $24.26M accountingfor 40% of the total revenues for the region. The specials revenuesare generated from a declining specials balance of 1.3% (Januaryspecials balances equated to 2.2%). YTD $372.56M has been generatedthrough specials activity which is 9% higher than during the samepoint in time in 2022.

NN Group NV (NN) was the highest revenue generating Europeanequity during September. During the month the company's share pricefell 11% after an unfavourable court ruling regarding the provisionof information in relation to the costs of investment linkedinsurance products that it sold during the 1990s and 2000s.

Nagarro SE (NA9), the second highest revenue generating stock,continues to see a share price that has fallen circa 65% since itsall-time highs seen towards the end of 2021. The company wasaccused of fraud in the Wirtschafts Woche magazine which hasaffected investor confidence and kept its share price depressedever since.

Outside of Compagnie Financiere Richemont SA (CFR), which is aluxury goods holding company, many of the other names continue toappear regularly in the table. The luxury goods sector continues tobe affected by the slowdown in consumer spending in both China andthe US and recently posted slower sales than the market expected intheir latest quarterly report.

ADR's

ADR's generated $20.87M in securities lending revenues duringthe month which represents a 34% decline YoY but an 11% increaseMoM. Average fees for the month, 90bps, also followed the sametrend showing a decline of 36% YoY but an increase of 9% MoM.Utilization increased over the period to 8.98% (8.62% duringAugust), marking its highest level since March.

During the quarter, ADR's generated $58.9M in securities lendingrevenues which is considerably lower (-43%) than during Q3 2022($103.2M). Average fees were significantly higher during Q3 2022(146bps vs 85bps Q3 2023) which helped to drive revenues higher.Balances remained 2% lower during the quarter YoY and utilizationdeclined by 3% to 874bps (vs 901bps during Q3 2022).

During September, Posco Holdings (PKX) was the highest revenuegenerating stock. The local line of this stock also remained apopular borrow in the APAC equity table. The company has seen arapid increase in its share price valuation over the last threemonths (+50%) as retail investors have been buying up the stock.Questions are being asked in relation to whether the company isovervalued and whether the company's growth potential iscommensurate with the recent increase in valuation.

ARM Holdings (ARM), one of the largest IPO's of the year so far,also appears in the top five highest revenue generating stocks.Shares in the company started to trade below their initial offeringprice in the last week of the month raising concerns over whetheran IPO revival is still possible.

Exchange Traded Products

The news of a revival in the launch of actively managed ETFs andthe takeover of Rize ETFs by Cathie Wood's ARK investments were thetwo biggest ETF related stories of the month. BlackRock alsoreleased their August ETF flow data during the month pointingtowards a slowdown in investment in ETF vehicles as Global exchangetraded funds received $65B of inflows, down from $90B duringJuly.

During September, exchange traded funds generated $52.7M inrevenues. This represents a decline of 29% YoY and 3% MoM. Averagefees continued to decline across all ETP's, with Asian ETPs seeingthe largest declined YoY.

During the quarter, exchange traded funds generated $150.2M inrevenues which represents a decline of 26% YoY and the lowestrevenue generating quarter YTD (Q1 $161.4M, Q2 $154.7M). Averagefees for the quarter were 64bps which remained in line with Q2.Balances declined 12% YoY ($93.4B) and utilization fell to 10.48%which was -14% YoY but the highest quarterly figure of the year sofar (Q1 10.42%, Q2 10.29%).

Despite a MoM decline seen in revenues generated by HYG ETFduring the month ($8.34M vs $12.04M during August), JNK, the SPDRBloomberg High Yield Bond ETF re-emerged into the top five highestrevenues generating ETFs for September. Recent press reportspertaining to an increase in default rates and an increase inissuance are likely to be fuelling the demand to borrow these typesof assets.

As Treasury yields continue to increase because of the selloffbeing seen across government bonds following the Federal Reserve's"higher for longer mantra", MUB, the iShares National MunicipalBond ETF also reappeared in the table. Prices of Municipal bondsdeclined across the board during the month, pushing the yields onsome 10-year issues to the highest levels seen since November.Continued price weakness is affecting the market, providingopportunities for directional trading strategies.

Across the highest revenue generating European ETF's, VXXcontinues to generate the highest revenues. This ETF is often usedby traders looking to short the VIX which continues to gaintraction. Other ETFs offering exposure to markets with onshorelending only capabilities such as India and China remained popularborrows.

Government bonds

Inflation proved to be far stickier in Europe than in the USduring the month, with analysts and investors growing concernedover how policymaking and economic conditions will start to differon each side of the Atlantic. Concerns regarding the speed in thedecline in core inflation in the US compared to Europe and thesluggishness seen in the decline in wage growth across Europe arecausing a growing number of investors to show a degree ofapprehension.

The Federal Reserve once again did as was expected, and voted tohold rates steady during the month, leaving its benchmark interestrate unchanged, while signalling borrowing costs are likely to stayhigher for longer after one more hike this year. US treasury yieldsmoved higher as a result with 10 year yields the hitting thehighest levels seen since 2007.

The Bank of England followed in the footsteps of the FederalReserve, halting interest rate increases during the month, as coreinflation figures finally started to move lower. The hawkish pausepushed Sterling lower during the month as the Andrew Bailey hintedto markets that he believed that interest rates were close to thetop of their cycle but would stay higher for longer than marketswere currently priced in.

The European Central Bank decided to raise interest rates by25bps to 4% during the month however taking the ECB deposit rateabove the previous record high recorded in 2001 when rate settersraised borrowing to boost the value of the newly launched Euro. ECBpresident, Christine Lagarde, refused to confirm whether rates hadreached their peak in the ensuing press conference. The Euroslumped to touch its lowest level since May and bonds rallied.Traders now see around a 20% chance of another hike, reflectinggrowing concern over the region's growth outlook.

In Asia, China's central bank cut the amount of cash lendersmust hold in reserve for the second time this year, by 25bps. Thisrepresents a move that will help banks support government spendingto stimulate growth in the economy. The Bank of Japan kept itsnegative interest rate and the parameters of its yield controlprogram intact during the month and the Reserve Bank of Australiadecided to keep interest rates on hold.

In the securities lending markets, government bond lendingrevenues dropped during the month with revenues of $150.5M,representing a decline of 10% YoY and 6% MoM. Average fees declinedslightly MoM from 18bps to 17bps but the continued decline inbalances affected both the headline revenue figures and the levelof utilization (-20% YoY).

During the quarter, $464.3M in revenue was generated. Q3 was thelowest revenue generating quarter of the year so far (Q1 $482.4M,Q2 $483.8M). Despite revenues declining during the quarter, whenlooking YTD, thanks to a very strong Q1 and Q2, government bondlending revenues remain higher than at the same point during 2022($1.43B 2023 vs $1.34B). Average fees during the quarter were17bps, down from 18bps during Q1 and Q2 but utilization declined19% (20% Q3 2023 vs 24.7% Q3 2022).

Shorter dated issues continued to drive the majority of thespecials activity but the emergence of longer dated bonds into thehighest revenue generating issues is starting to take place. Ascentral banks appear to be reaching the peak of their hiking cyclesthose bonds with higher duration risk become more sensitive to theimpact of higher rates for longer. As yields have been increasingaggressively in these issues, prices have been falling, which hasgiven rise to an increase in directional opportunities in longerdated issues.

Corporate bonds

As interest rates have risen aggressively over the last eighteenmonths, investor interest in corporate bonds has grown. Despite aninitial assumption that the rise in rates would put globaleconomies into recession, market data has remained resilient whichhas amplified investor confidence in an asset class that isoffering increasingly higher yields against a buoyant marketbackdrop. When looking at investment performance, the S&P highyield corporate bond index has increased 6.95% over the past yearwhilst the S&P Global Developed investment grade corporate bondindex has increased by 3.38%.

Corporate bonds have been issued at a record pace throughout theyear and September has seen some of the busiest days on record. Notonly has September recorded the busiest day since March 2020 forissuance but the total issuance for the week ending September 15thexceeded $50 billion. One trend that has been apparent throughoutthe recent spate of issuance has been the focus on the short end ofthe curve. As 30-year Treasury yields have been trading at theirhighest levels in more than a decade many issuers have beenreluctant to lock in the higher funding costs. Shorter durationdebt has therefore been the preference in the hope that interestrates fall next year, and refinancing can take place to lock inlower rates. A focus on shorter dated debt has also been a themewithin the securities lending markets. Eight out of the top tenhighest revenue generating corporate bonds of the year so far froma securities lending perspective have all had maturities of underfive years.

In the securities lending markets, the buoyancy of this assetclass continues to be reflected in the revenue numbers. Despiteposting one of the lowest monthly revenue figures of 2023 so far,September revenues still increased 3% YoY, making corporate bondsthe only other asset class, along with APAC equities, thatexperienced an increase in revenues. Average fees followed suitfalling MoM to their lowest level of 2023 so far, 41bps, butposting an increase of 4% YoY.

When looking over the quarter, Q3 revenues performed well.Corporate bonds generated $279.1M over Q3 which represents anincrease of 11% YoY. As with many other asset classes, whencomparing the revenues YTD, they remain significantly higher thanat the same point during 2022 (YTD 2023 $872.9M vs YTD 2022$687.2M) given the strong start to the year. Average fees trendedlower over the quarter (42bps) (Q1 46bps, Q2 45bps), with Septemberseeing the biggest dip of any month during Q3. Utilization declinedto 5.61% during the quarter, down from 5.79% during Q2 as lendableincreased by 2% and balances declined by 2%.

When looking at the highest revenue generating corporate bondsover the month many of the names remain familiar. 3M Co bonds inthe US remain under pressure given the impending fines, waterutility companies remain popular borrows in the UK following recentfunding issues, and the automobile sector remains popular acrossEurope as the transition to electric production lines and supplychains increase costs for manufacturers.

Repo market

Over the past month, data from S&P Global MarketIntelligence Repo Data Analytics showed that global volumes in bothrepo and reverse repo markets decreased whilst haircuts and averageterms increased.

Repo volumes: Volume -12.3%, Weighted AverageHaircuts +0.02%, Average term increase of 8 days (87.19 dayscurrent average).

Reverse repo: Volume -3.3%, Weighted AverageHaircuts +0.06%, Average term increase of 6 days (134.39 dayscurrent average).

EMEA

Across the EMEA region, government bond repo volumes decreasedby 11% and reverse repo volumes declined by 4.8% over the month.These moves were led lower by a sharp decrease in activity acrossboth Spanish (-20%) and Italian government bond (-15%) repoactivity.

A 36% decrease was also seen across French investment gradecorporate bond repo volumes over the period despite spreadswidening over the month.

US

Activity across US treasuries was mixed over the month as repovolumes declined by 18% whilst reverse repo volumes increased by3.5%. Specials activity in the treasury market remained focused onthe short end of the curve with the 2023, 2024 and 2026 issuesbecoming more expensive. Treasuries in the 5 years+ issuescheapened over the month.

Across the corporate bond markets, repo activity across the USDdenominated high yield and investment grade bonds generallycheapened over the month with rates declining by 6%. Volumes inboth USD denominated investment grade and high yield corporatebonds remained unchanged over the period.

APAC

Government bond markets experienced an increase in volumesduring the month of September. Reverse repo volumes increased by4.3% and repo volumes increased by 2%.

Japanese government bond repo volumes increased by 5% overSeptember whilst reverse repo volumes increased by 8%.

Across the corporate bond markets, the most notable market moveswere seen across USD denominated China high yield corporate bondrepo activity (+20%), and USD denominated Korea high yield reverserepo (+36%).

Conclusion

September securities lending performance was reflective of agrowing uncertainty starting to grip financial markets. Arealisation by market participants that higher interest rates arelikely to be a reality for some time to come have made investorsre-evaluate their current strategies. The sell off during Septemberappears to have impacted securities lending markets, as thereversal taking place in the ongoing trends of increases in marketvaluations and the hawkish nature of monetary policy starts tounwind.

As we head into Q4, it's possible that securities lendingrevenues will continue to fall further until either a soft landingin the US can be confirmed or economic data starts to provideclearer signals, offering a greater level of comfort to investors.Despite the decline experienced during September and Q3 however, anexceptionally strong start to the year is likely to help marketparticipants experience a strong 2023.

If you would like to receive further details regardingQ3 performance, please download a copy of our Q3 Securities lendingsnapshot and ensure that you register for our Q3 webinar that willbe taking place on the October 31st at 3pm UK time.

If you are based in New York, please also be sure toregister for our upcoming Securities Finance Forum at 1345 6thAvenue. New York, NY 10105 on November 9th, 2023, between 1:00pm -7:00pm where we have numerous market leaders scheduled to discussthe past, present, and future of the securities lendingmarkets.

To register for the forum and to see the agenda pleaseclickHERE.

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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.