- Securities finance revenues remain strong during August
- Americas equity revenues increase 93% year-on-year (YoY)
- Corporate bonds experience strongest revenues of 2022 yet again
Despite August traditionally being a quiet month for securities finance activity, global securities financing revenues hit $1.124 billion during the month. This was the second highest revenue generating month of the year after July set the bar at $1.125 billion. Revenues increased 47% YoY across all asset classes combined with double digit and in the case of corporate bonds triple digit increases across the vast majority of sectors.
Asset classes to note when revenues are compared with August 2021 are Americas Equities (+93% YoY), ADRs (+88% YoY) and corporate bonds (+119% 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 93% increase YoY. Average balances were up an impressive 28% YoY, average fees were up 51% YoY and average utilization was up 16% YoY. Month-on-month (MoM) the data was less impressive showing a decrease in monthly revenues of 12% however.
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 $181m 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 34% of all Americas revenues.
APAC equities
APAC equity revenues increased 3% YoY but were down a modest 4% when compared with July.
Taiwan was the top earning market once again generating $44 million 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 utilization figures which show a 9.6% increase YoY.
Revenues in Japan increased an impressive 25% YoY with average balances increasing 17% YoY. Average fees and utilization 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 119% 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 $101 million during the month of August. The highest revenues were generated by German equities during the month, increasing 31% YoY. Norwegian and Swedish equities were very much in focus throughout the month with revenue increases of 246% and 175% respectively. Equinor Asa contributed to 42% of Norway’s monthly revenues alone after a sharp decrease in expected profits caused speculators to short the stock.
Average balances saw remarkable increases across all EMEA markets apart from Denmark, Spain and Belgium. Outside of the Nordics, both Germany and France saw double digit increases of 77% and 78% YoY respectively. Utilization 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, fueling demand to borrow.
Utilization 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.
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 $156 million during the month. Average fees continued to increase YoY despite average balances and utilization 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 $86 million. 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 119% YoY, balances were up 27%, fees were up 73% and utilization 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.
Summary
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.
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 utilization 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.