An In-Depth Look at 2022: A Near-Record Year for Securities Lending Revenue
Alec Rhodes, Data & Analytics Product Specialist
Doug Thomson, Business Rotational Analyst
January 23, 2023
Performance Wrap Up:
With the last chapter of 2022 now written, volatility is beginning to feel like one of the only things investors can count on in an age of seemingly continuous market turbulence. While capital markets faced a backdrop of economic uncertainty in 2022, the securities finance industry generated $9.89 billion in revenue for lenders, a 7% year-over-year increase and just shy of the post-crisis high recorded in 2018.
Regionally, North America and EMEA had 10% and 6% year-on-year revenue increases largely due to fixed income performance. In Asia, a market that is proportionally skewed toward equities, revenue was down 2%.
At the asset class level, interest rate fluctuations created a robust bond market, resulting in a 25% year-over-year increase in lending revenue due to higher fees across the board. Corporate debt was the biggest driver, with an 83% revenue increase, while U.S. Treasurys and UK gilts helped generate an additional 10% in the sovereign lending market.
Equity performance was more mixed but ultimately made modest revenue gains of 2% with fees ticking up compared to 2021. In North America, revenue rose 7% on the back of an 11% increase in fees. Conversely, revenue was down in Asia and EMEA by 7% and 2%, respectively.
Increased average fees can be interpreted as a “specials” driven market and observing the quintile of fee bands tracked by DataLend appears to back up that view. Revenues in “Hot” securities (101-300bps) and “Special” securities (301+ bps) made up 56% of overall revenue, up from 54% last year. Conversely, the “Super GC” (0-25bps) and “GC” (26-50) fee bands accounted for 30% of total revenue, down from 33% year-over-year.
“Meme” stocks continue to stay relevant, among top revenue drivers
U.S. “meme” stocks, names where retail activity drove lofty price rallies in 2020 and 2021 only to precipitously fall in 2022, were among the top revenue generators for lenders in 2022. In descending order, the top five earners were electric vehicle manufacturer Lucid Group (LCID), video game retailer GameStop Corporation (GME), food producer Beyond Meat Inc. (BYND), broadcasting company Sirius XM Holdings (SIRI) and pharmaceutical company Cassava Sciences Inc. (SAVA). The top three are routinely identified as meme stocks.
Ranging in revenue from $216.4 million to $96 million per security, these five stocks collectively generated over six times as much revenue in the lending market in 2022 as the year prior. All are in very high borrow demand with a Short Interest Indicator greater than 20, meaning that over 20% of the publicly available float is out on loan. This implies that investors continue to believe the value of these securities will depreciate, for varying reasons.
Additionally, nine of the top 10 performing securities in 2022 were U.S. common shares, with iShares iBoxx $ High Yield Corporate Bond ETF—which tracks high-yield U.S. corporate bonds—the one exception in the mix. Other top-earning securities include movie theater company AMC Entertainment, coffee chain Dutch Brothers Inc, AI lending platform Upstart Holdings and business intelligence company MicroStrategy.
Corporate debt shines as investors react to interest rate fluctuations
Stating the obvious, inflation shock and subsequent central bank interest rate movements dominated financial press front pages in 2022. And while fiscal pundits are most certainly more focused on the S&P 500’s worst performance since the 2008 crisis, these policy decisions have significant implications in the world of securities finance.
As short demand in a security is a primary driver behind the cost to borrow, it is not particularly surprising that nine of the top 10 earning corporate debt securities came from high-yield bonds in 2022. Corporate debt had a record year; the top 10 earners had fees 54% higher than the 2021 average, and U.S. corporate debt revenue doubled year over year. Highlighting the increased demand for this asset class, EquiLend’s multi-asset securities finance trading platform, NGT, recorded 18% growth in corporate debt trading volumes over 2021.
One likely driver of the rise in high-yield debt lending is the growing default rate in the U.S. and Europe. Fitch Ratings assessed the 2022 high-yield corporate bond default rate at 1.3% (as of November), up from 0.5% in 2021. The agency further projects this rate to climb to between 2.5% to 3.5% in 2023 and 3.0% to 4.0% in 2024. Fitch further asserts that the demand for distressed debt will continue to grow as firms face challenges accessing liquidity in a projected economic recession.
Shorts questioning the floor of the equity market
With the major U.S. equity indices firmly in the red for 2022, there has been much debate over the characterization of both the U.S. and global economies. Most commentary on the subject seems to agree that a global recession is on the immediate horizon, if not already underway. Despite this near consensus, much ink has been spilled debating the projected depth of the contraction and how long it will take before long investors can expect positive returns.
Despite the broader selloff, the securities lending marketing performed well, with revenue up 7% in U.S. equities. Similarly, U.S. equity trade volumes rose 8% on EquiLend’s NGT trading platform. Unsurprisingly, names from some of hardest-hit sectors including electric vehicles and cryptocurrency-related securities were among the most active stocks in the lending market.
One of the few areas where securities lending deviated from broader market behavior was in the energy sector. According to MarketWatch, energy was the top-performing S&P 500 sector, reaping a 59% price increase and the only sector to make gains in 2022. Energy was also the equity sector to experience the biggest proportional lending revenue improvement in 2022 with global year-over-year gains of 50%. This perhaps suggests that short investors are expecting a market correction on energy securities in 2023.
Investors will continue to watch with a keen eye to see what trends have the greatest impact on the securities lending market in 2023. While economic and geopolitical tensions will undoubtedly present continued challenges, the securities finance market remains robust as burgeoning technologies, greater transparency and improved data availability provide opportunities for market participants.
About DataLend
DataLend, the market data service within EquiLend’s Data & Analytics Solutions group, tracks daily market movements across more than 62,000 unique securities in the $2.5 trillion securities finance market. www.datalend.com
About EquiLend
EquiLend is a global financial technology, data and analytics firm offering Trading, Post-Trade, Data & Analytics, RegTech and Platform Solutions for the securities finance industry. EquiLend has offices in New York, New Jersey, Boston, Toronto, London, Dublin, India, Hong Kong and Tokyo and is regulated in jurisdictions around the globe. www.equilend.com