In December 2020, experts from the beneficial owner, agent lender and data provider community gathered to discuss how the securities lending market can be better at implementing environmental, social and governance (ESG) principles.

Attendees:

Steve Kiely, BNY Mellon

James Day, State Street

Dimitri Arlando, DataLend

Roelof van der Struik, PGGM

Martin Aasly, NN IP

Andrew Geggus, BNP Paribas

Radek Stech, Global PSSL

Oliver Wade, Global Investor Group

Chair: Before we turn to ESG, let's assess the health of the market.

Dimitri:  Total lendable assets averaged $21.94 trillion so far in 2020 (year to date to November), representing an increase of 7% compared to the same period in 2019. The actual breakdown of beneficial owners remains the same. Collective investment vehicles continue to be the largest suppliers of lendable assets, and together with pension funds and government entities account for about 85% of the market in terms of lendable assets. That carried through into the on-loan amounts as well, so pension funds, government entities and collective investment vehicles accounted for about 85% of assets on-loan. What changed here was the make-up of those top three with collective investment schemes dropping to third in the list, which is not surprising, because they tend to be highly regulated and have more restrictions which results in less on loan compared to the other two.

The average on loan amount of $2.2 trillion in 2020 is more or less in line with the 2019 average of $2.22 trillion.

Taking a look at revenue, the global year to date revenue figure was $6.91 billion, which is 14% lower than the same period in 2019.

Looking at the weighted average fees and the utilisation figures, it is clear that the fee component is the main reason for the lower revenue, with equities in particular seeing a significant drop in 2020. EMEA equities are down 20% this year in fee terms, and fixed income fees are down 10%.

The breakdown of revenue by fee bands shows that for equities the biggest impact was in the 50-250 bps band or the ‘warm bucket’ if you like.

For fixed income, most of the revenue comes from general collateral or GC trades, and in fact 2020 saw an increase in revenue. French government debt dominated in 2020 accounting for about 25% of the total fixed income revenue for the EMEA region.

Finally looking at the top performers, German battery manufacturer Varta AG was this year’s highest revenue generator in Europe, earning beneficial owners $76 million. Together with Wirecard, the two securities helped the German market dominate and indeed outperform in 2020 compared to 2019; it was the only major European market to do so this year. Overall, the top 10 securities in 2020 generated 9% more revenue than the top 10 in 2019.

When you look at the top 100 securities, you start to see it turn negative, and comparing the 2020 figures to the 2019 figures, you can see that the top 100 revenue was 13% less than in 2019, and for the top 250 it was 15% less than 2019.

Interestingly, on any given day, there are about 13,000 unique securities out on loan for the EMEA region (55,000 globally), and yet 60% of the total revenue comes from just 250 of those securities.

Chair:  How have the events that have unfolded this year impacted certain sectors and what stocks in particular have been hit the hardest?

Steve: We’ve covered a lot of this ground already this year, but just to sum up, I don’t think there are any surprises really; 2020 has not been the greatest year. Having said that, we had a good first half as we were up year-on-year in Q1 and Q2 and that was buoyed by all the usual suspects: when the effects of the pandemic first started to be felt HQLA was holding up, then there were  good opportunities in the equity space, in the US and Europe, and then Asia. If I look at our book, it is not dissimilar to what Dimitri just showed: Europe has been buoyed in the Sec Fin space by Germany. It’s in no small part due to Wirecard, but also the travel sector such as Lufthansa, and that’s what we’re seeing everywhere with those types of stocks being shorted. The energy sector, travel, retail were all being shorted, but so too were REITS. The real estate stocks were under stress before the pandemic volatility kicked in and continued to be shorted strongly throughout. Then we saw probably the quietest Q3 for quite some time, which I think is probably due to external factors - there’s an element of everyone pausing for breath with the working from home, a bit of COVID restriction fatigue setting in, and then I think the real effect of things like a lack of M&A, lack of corporate activity, cancelled dividends. I’m pleased to say that we’ve seen some of the Scandinavian companies issuing dividends in Q4, which is indicative of market health and there are some positive noises from European regulators around lifting the restrictions on issuing dividends next year.

I think at the start of the year, with the volatility, sec lending did very well, and for a lot of clients it was a very useful hedge to the significant downturn that was affecting the cash market. I think Q4 is looking up. I’m more positive than I’ve ever been and I think we’re going to have a good year. I think post-COVID we’re going to start seeing increased activity, increased travel and hopefully a very good 2021.

Chair:  Roelof, how have the events this year impacted your business and is there anything you have had to do differently to what you may have not done last year?

Roelof: I think my numbers are pretty much aligned with markets, so it’s all a little bit dull – high value/low volume programme. That means it isn’t hit quite as hard sometimes but I do require quite high quality collateral so I’m not the most attractive lender on the block. My performance is down 5-10% this year net. For the first time I’ve put on a financing trade so that I’m taking in cash collateral for one of my funds who is looking for funding. Incremental income is important, but being able to help your clients when they need funding or hedging, is even more important than giving them some incremental income.

Martin:  We have actually had a very decent year. We are quite active in the  government bond space, and just like Roelof we also had some funding trades, specifically in the March and April period where we faced a number of challenges in getting enough funding together on the repo market as a lot of banks’ balance sheets were closing up. But all in all our performance for the year has been good.

Roelof:  I don’t lend out my government bonds. I’m looking at it for next year, but I think again there that’s not for incremental income, but for liquidity reasons.

James:   Looking at the Fed cut in March 2020 you saw clients that had duration in their reinvestment programmes did better with the rate change, and in some of the figures you can see that the percentage of reinvestment returns into the overall lending fee post-March was relatively considerable.

Steve:  I’d back that up, just to jump in there. I agree, James. That was a considerable factor in our Q1/Q2 performance.

Chair:  Dimitri, what is the data suggesting?

Dimitri:   Lufthansa AG features in the list of top performing securities, as does Unibail which is a European commercial real estate company. Naturally the transport and retail/commercial real-estate sectors have performed well this year in the lending market because of Covid.

The other interesting one is the pharmaceuticals sector. If you broaden the top securities and look at the global best performers, Inovio was very much a pharmaceutical stock that experienced a rollercoaster ride throughout the year. Positive news for a Covid vaccine resulted in the stock price rising and short selling activity increased. Since then they haven’t really released any updates and news of a potential vaccine fizzled out towards the end of the year, which resulted in less fluctuations in the share price and lower demand from short sellers. It will be interesting to see how Pfizer and Moderna perform. There hasn’t been a huge spike in activity as yet, which is a testament to people having confidence that the vaccines are going to be successful.

Throughout the year, the amount of short activity in the US and in Asia in particular has been less than in previous years. The number of IPOs that generated significant revenue compared to the previous year has also been less.

We did some analysis in our recent research publication The Purple, where we looked at short selling bans. In the European markets where short selling bans were imposed, there was clearly subdued lending activity compared to markets that didn’t impose bans. In Asia, the data clearly shows that the Korean lending market has suffered significantly because of the short selling ban, which should continue now until March of next year given that the ban has been extended.

Andrew:  We definitely saw liquidity increase significantly in Q3 which is when we saw spreads really narrow, adding to the quiet Q3 overall. Leading into year-end I would say we haven’t seen spreads reach levels that they have previously in the last five years. We are still seeing a bit of an uptick of demand but obviously the amount of liquidity that’s out there is much higher than in previous years.

Steve:  It’s interesting Andrew. Our experience was that when the real extent of the pandemic became known, and volatility started to increase, there was the usual flurry of activity around HQLA, which is pretty standard for such an event. But very quickly, we saw just as spreads started to come off a bit in the Govt bond space, a number of clients started to limit the amount of lending allowed in government bonds, because they wanted to sell them in order to take advantage of the buying opportunity in the equity market. I really noticed the view that equities were good value after the initial volatility bout when the indices dropped significantly, and government bonds were well bid, so we saw some transformation shifts within the underlying portfolios from govvie bond to equity.

To Be Continued