By Chris Benedict, Director, DataLend. It has been a little over a week since the British referendum to leave the European Union stunned the world, sending the pound sterling and global markets into free fall. Since then, cooler heads have prevailed and markets have stabilized and rebounded on the suggestion that perhaps Brexit is not the end of England nor the European Union after all. DataLend reviewed the immediate aftermath of the vote to see if we could discern any interesting patterns in the securities finance market.
In the U.K. we saw volume-weighted average fees to borrow equity securities rise a bit from 48 to 51 basis points (bps) in the days following the vote. Utilization saw a small uptick from 6% to 6.5%. We dug a little deeper to see what drove this.
The biggest impact Brexit had in the equity securities lending market was to U.K. financial services firms, particularly banks and real estate companies. We saw fees to borrow U.K. financial services stocks jump from 40 bps to 61 bps in just a matter of days on significant volume. U.K. bank stocks in particular have seen fees jump from an average of 25 bps on June 23 to a high of 75 bps on June 28, a 200% increase. Broker-to-broker fees in U.K. bank stocks traded even higher at 112 bps. Utilization has also climbed from just under 5% to 9.29% during the same timeframe.
Fees to borrow U.K. real estate firms show a similar pattern, with fees increasing from 38 bps on June 23 to 52 bps by June 30, representing a 50% increase. Utilization for U.K. real estate stocks followed suit, going from 7.2% to 8.7% during the same timeframe.
Compared to hotter industries such as U.K. information technology (currently trading at 390 bps), these fees may not seem particularly incendiary; however, they still represent a significant change in demand to borrow the U.K. financial services sector. We will continue to monitor fees in U.K. financials, particularly in light of the Bank of England’s announcement on July 5 to ease special capital requirements for banks.
Elsewhere in Europe, demand to borrow financial services companies remained largely unchanged. French financials warmed up slightly from a volume-weighted average fee of 26 bps on June 23 to 31 bps by June 30 with utilization steady at 5%. Fees to borrow German financial services firms also grew from 28 bps on June 23 to 36 bps on June 30, along with utilization from 5.5% to 7.2%.
In the European fixed income market, there has been a slight increase in fees to borrow European sovereign debt, from 14.81 bps on June 23 to 16.36 bps on June 30. This appears to be fueled by fees in German bunds, which have increased from 14.45 bps to just under 18 bps during the same time period—although utilization remains largely unchanged at a little over 8%. French sovereigns, however, have remained steady with fees around 15 bps, although the utilization is strong at around 38%.
In the U.S., Brexit has roiled the Treasury markets. In the days just prior to and after the referendum, the volume-weighted average rebate one-day on U.S. Treasuries increased significantly. We saw the one-day rebate for U.S. Treasuries trading at around 45 bps on June 20 and the 21, just a few basis points above the overnight rate. By Wednesday, June 22, that rebate had risen to 49.13 bps. By Thursday, June 23, the figure had reached 54.11 bps. Once the results of the referendum were announced, the one-day rebate jumped to a high of 73.33 bps, representing a very significant 63% increase from the beginning of the week.
While the one-day volume-weighted average rebate has dropped a bit since then, we are still seeing sizable transactions booked at 150 bps as of July 1. It is important to highlight that the spike in repo rates is likely not only due to Brexit but also because of the quarter- and half year-end factors as well.
Clearly the impact from the Brexit referendum will be long lasting and could create more tumult in the equity and fixed income markets. DataLend will continue to keep you updated on the latest events in the securities lending and funding markets.
