Q2 Securities Lending Revenue Review
July 19, 2024
As the second quarter ends, EquiLend Data & Analytics looks back on the performance of the securities lending market during an eventful three-month period. While markets rose this quarter, securities lending revenue declined amidst the return of meme stock mania and adjusting to new trade structures for T+1 settlements. The securities lending market generated $2.53 billion in revenue, a notable 15.7% decrease from the same period last year. Equity markets saw a 16.78% drop in revenue as specials demand cooled from the prior year and fixed income revenues experienced an 11.78% decline as demand for Corporate Debt waned from all-time highs.
North American Equities
The North American equities lending market generated $1.03 billion in revenue for Q2, a modest 2.38% growth from the previous quarter but a significant 19.2% drop YoY.
The decline in revenue can be attributed to a 22.11% decrease in fees compared to Q2 2023.
This quarter’s top earners section spanned multiple sectors, including Consumer Discretionary, Communication Services and Healthcare to name a few. Lucid Group (LCID) and Trump Media (DJT) grappled for the top earner spot this quarter, with Lucid Group earning $53.8 million and Trump Media earning $53.4 million in revenue. Coming in at the third highest earning company was Immunitybio (IBRX), which yielded $30 million in earnings, a 595% surge YoY.
Honorable Mention: Visa
While not in the top 5 earners list shown above, Visa continued to be a high grossing security for North American equities, placing within the top 10 for Q2, but that may be coming to an end.
Class A shares of Visa (V) have acted as a long-standing hedge for financial institutions holding restricted Class B shares since Visa went public in 2008. The heavily utilized security has regularly been a top earner for the industry despite its low GC-level fee, due to its substantial demand. However, an exchange offer in early May provided Class B holders with a potential end to the restrictive, but highly profitable, long position.
At the beginning of the year, $66 billion of Visa Class A stock was on loan at an average fee of 12 basis points. Toward the end of June, the exchange offer expired and demand in the Class A shares has steadily declined to 10.6 basis points fee on $40 billion on loan. As additional hedge positions unwind, the lenders of the Class A shares will have to look elsewhere to supplement the 16 years of consistent returns on their securities lending program. Visa will be an interesting security to watch as the year goes on.
EMEA and APAC Equities
Following a similar decline, the revenue for the EMEA equities market was down 33.3% YoY, at $373 million. While average fees were up 35.3% from Q1, they represented a 22.8% decrease from Q2 2023. Similarly, on loan balances dropped by 14.2% YoY, further driving revenue decline. The top earning country in the region, France, generated $69.6 million in revenue, followed by Switzerland and Sweden at $51.4 million and $50.9 million respectively.
The two dominant sectors in the region were Financials earning $90.2 million, and Industrials earning $75.2 million, both up over 110% from the previous quarter. With a lack of specials in the region, the top earners were largely concentrated around corporate event activity as is common in the second quarter. However, Swiss biotech firm Idorsia Ltd continued to see high demand after reporting disappointing revenues in Q1.
The APAC equities market bucked the downward trend and displayed growth in Q2, as it contributed $522 million in revenue, an 18.7% increase from Q1 and an 8.45% increase from Q2 2023. Taiwan surpassed Japan as the top earning market of the region, with the former generating $204 million and the latter generating $164 million in revenue. Earning over $186 million in revenue, Information Technology was the region’s leading sector, up 39.1% QoQ and 47.67% YoY.
With the US in an election year, there are sure to be more newsworthy names active in the securities finance market in the second half of 2024.
Government Debt
Overall, the global sovereign debt market observed a minor uptick in revenue to $420 million, up by 0.36% this time last year. Even though average fees decreased by 11.65%, loan balances crept up by 11.02% compared to Q2 2023. Unsurprisingly, the highest grossing market was the US, earning $239.8 million in revenue, followed by France and Canadian governments, generating $45.7 million and $27.5 million respectively. CALIFORNIA STATE 7.5% MUN 01/04/2034 USD was the top earner for the global sovereign lending market, accumulating $4.4 million in revenue for Q2, an impressive 24,205% jump from last year.
Regionally, US Treasurys and CAD governments marked a decline in revenue to $266 million, down 0.6% QoQ and 1.8% YoY. Conversely, sovereign debt activity in EMEA improved 10.1% from Q2 last year, generating $132 million in revenue. APAC sovereign lending remained fairly steady as it grossed $15 million in revenue, a 1.67% increase QoQ and a 3.9% decrease YoY. Notably, Australia led the lending activity in the region, earning $8.2 million in revenue, a 43% spike YoY.
Corporate Debt
The global corporate debt market showed a significant decline in Q2, grossing $174 million in revenue, down 31.7% YoY. Although corporate balances were up 8.6% YoY, a hit to average fees was the main culprit this quarter, as they dropped 37% from Q2 2023. The United States was the highest earning market for corporate bonds, grossing $92 million in revenue, but at a 21.2% decrease YoY.
Global lending activity for investment grade credit felt the impact, as revenue fell by 30.5% YoY to $81.9 million. 3M COMPANY 4% SNR MTN 14/09/48 led investment grade credit in Q2, as it amassed over $1.4 million in revenue, however down 55.2% from last year. In a similar state, activity for high yield credit dropped by 32.7% from Q2 2023, as total revenue amounted to $92.3 million. Leading the top high yield credit earners was HANESBRANDS INC 9% GTD SNR 15/02/31, grossing $3.4 million in revenue (+1,114% YoY), followed by BIOMARIN PHARMACEUTICAL 1.25% CNV SUB 15/05/27 USD and HERTZ CORP 5% GTD SNR 01/12/29, earning $1.7 million (+36.4% YoY) and $1.7 million (+23,388% YoY) respectively.
Conclusion
Across the second quarter of this year, markets have risen amidst a period of limited volatility, and as such securities lending revenues have declined. As we head into the second half of 2024, will it be more of the same or will the possibility of interest rate cuts and upcoming global elections have a bigger impact on the financial markets? Make sure to stay tuned to EquiLend Data & Analytics to see the impact on the securities lending market.