Recapping Q3 Performance – A Mixed Bag for Securities Lending Participants
By Alec Rhodes, Data Specialist, Data & Analytics
October 17, 2024
North American Equities
U.S. equities, which generated 44% of global securities finance revenue, continued to cool year-over-year. With a strong run for U.S. stocks, one that has seen a 20% return for the S&P 500 year-to-date, and inflation concerns beginning to abate, the “Specials” side of the U.S. securities lending market has been understandably quieter after an economically tumultuous 2023. U.S. Equity revenue fell 12% year-on-year for the quarter, due to a 17% decline in the average fee lenders were able to command.
From a specials perspective, Sirius XM Holdings (SIRI US) was a major outlier, generating $138 million in revenue during Q3 with average fees climbing 1552% in July. SIRI shares remained in demand as the result of an arbitrage opportunity with shares for holding company, Liberty Sirius XM Group (LSXMA, LSXMB) trading at a significant spread.
The opportunity came to a head when parent company Liberty Media made a late August announcement proclaiming both a merger of Sirius XM Holdings and Liberty Sirius XM Group, and a 1-for-10 reverse stock split to occur on September 9th.
While the flurry surrounding SIRI was not enough to make up for an otherwise sleepy US equity market, Canadian securities generated solid returns with 3% year-over-year revenue growth as fees climbed 29%.
APAC Equities
Returns for APAC equities in the lending market declined 6% year-over-year. Revenues in the region were largely improved, with the Taiwanese and Japanese markets continuing to see increased interest from short side investors. The continued short selling ban in Korea offset gains elsewhere in the region, though the country’s National Assembly recently passed a bill that is set to lift the band by the end of March 2025. Head over to our Q3 APAC performance update for a more in-depth breakdown.
EMEA Equities
Revenue for EMEA equities fell by 5% year-over-year as fees ticked lower in the region. Performance across different markets varied widely, with UK and French equities, the top-two earning markets, seeing significant improvements over Q3 2023 with 31% and 28% growth respectively. In the UK, a 34% upswing in balances was largely responsible for the improvement, while in France, it was a 50% jump in average fees.
On the flip side, German and Swedish stocks, the third and fourth largest markets saw a weighty 37% and 34% decline. Fees were the primary culprit with drops of 20% and 39% respectively.
Swiss pharmaceutical researcher Idorsia Ltd (IDIA SWX) was the top earning security in the region, generating nearly $7 million in revenue. The firm has been hit with analyst downgrades as poor sales have led to a 31% loss in stock price YTD.
Industrials, the largest equity sector in the European lending market, stuck out as a laggard with revenue declining 27% due to a sharp 36% decline in fee year-over-year.
Fixed Income
Lending for government issued bonds improved by 14% over Q3 2023. U.S. government bonds, which represented 59% of the sovereign lending market revenue, improved 22% year-over-year as balances climbed. Despite the increase in volumes, cost-to-borrow broadly fell as the federal reserve signaled and eventually executed an aggressive 50bps rate cut following their September meeting.
The US 20-year bond issued on August 15th (US912810UD80) was the top earning debt instrument for the third quarter and the third highest earning security in September with nearly $14 million generated, indicative of both the high demand for treasuries and the limited specials in the equity market. DataLend will continue to monitor government lending activity as the global economy shifts into a declining interest rate environment.
Revenue for corporate bonds fell 18% year-over-year as average fees declined by 29%. High-Yield revenue fell by 17%, primarily due to a sharp 51% downturn for APAC names. In the investment-grade space, revenues declined roughly 30% across the board.
Despite the annual decline, corporate bond lending did see improved revenues over Q2, up 6%. As newly declining interest rates are likely to entice corporations who are waiting to issue or re-finance debt, lending dynamics have the potential to shift.