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14 Securities Lending Market Report | December 2023 15

US

>>> USD Cash Funding was a lending market theme that re- Specifically, for HY debt, when bond prices moved lower Fig 6 - S&P Global
emerged in 2023; one that seemingly pushed non-cash in response to the higher rates, supply began to contract
collateral lending into the background. When considered at agent lenders which had a compounding balance and North American Equity Market Cash vs Non-Cash
from the perspective of lenders, cash funding is simply revenue impact for remaining lenders in the market.
lending US equities or US corporate bonds at an ‘enhanced’ Furthermore, eSecLending witnessed strong participation 300.00
general collateral rate as a means to raise additional USD and YoY fee growth in most of its auctions for exclusivity.
cash for that lender to allocate to either traditional or Stable inventory is desired and almost mandatory for brokers 400.00 280.00
non-traditional reinvest opportunities. eSecLending has in the HY and EMD space and accessing inventory via
380.00
witnessed substantial growth in both demand and supply exclusives has been a strong solution in the period reviewed On-Loan vs Cash (Billions $) 420.00 260.00
for this trade type; program balances started the year here. IG bonds mostly traded at standard general collateral 360.00 240.00 On-Loan vs Non-Cash (Billions $)
already healthy and then proceeded to grow 100% YoY, and rates, ‘desk rates’, but because of the increased volume in
advanced 35% in the period reviewed here. The driver of USD cash funding, the market’s preference in this space, 340.00 220.00
revenue for USD cash loans has been increasing yields as coupled with the higher rate environment has resulted in
the US Fed has aggressively moved interest rates higher. The IG bonds and HY bonds producing higher revenue from a 32.00 200.00
cost of lending equities vs USD cash moved up much slower combination of wider total spreads and higher balances. Jul 23 Aug 23 Sep 23 Oct 23 Nov 23 Dec 23
than has yield, therefore resulting in a total spread trade All told, the market sentiment in securities lending in 2023 Group Balance vs Cash Group Balance vs Non Cash
that was very profitable for many in the US Equity lending improved from the first half to the second. We saw many
space. This is reversing the trend seen for many years of new positive trends such as event driven deals and IPOs
a preference for non-cash collateral by prime brokers and increasing in scale and profitability. In specials lending, we
created a more balanced dynamic between cash and non- saw a continuation of high lending fees paid for stock in Fig 7 - S&P Global
cash collateral in the region; higher nominal interest rates sectors such as Electric Vehicles and Biotech. However,
make USD cash collateral more attractive for both sides the market punished these stocks and many others with
of the loan transaction. Then in the back half of 2023, we negative cash flow, and the result was markedly lower North American Equity Market
again saw borrowers looking for non-cash balances as they stock prices, which meant lower lending revenues in the
dressed up their balance sheets for year-end.
back half of 2023 despite holding serve on the fees paid to 18.00 0.70
Credit bond lending outperformed many other asset classes borrow that same stock. Corporate bond lending finished 17.00 0.68
for both full-year and half-year periods, and that includes the year with fantastic momentum and a growing short
high-yield (HY) bonds, investment grade (IG) bonds and base and balances. Finally, the USD Cash funding trade in 16.00 0.66
global emerging market bonds (EMD). US interest rates 2023 has proved to be a worthwhile trade for both sides Lendable Value (Trillions $) 15.00 0.64 On-Loan Value (Billions $)
predictably marched higher for most of the year so it isn’t of the transaction and we’d expect this space to take its 14.00 0.62
surprising that shorts were crowded in the credit lending lead from future rate moves next year dictated by The Fed.
and EMD space, both of which are spread products that May the 2024 securities lending market carry on with the 13.00 0.60
use the US Treasury (UST) curve as a benchmark. Global momentum enjoyed in 2023 and bring lenders increased 12.00 0.58
credit bond prices have moved lower in lockstep with corporate event opportunities, increased IPO issuance, Jul 23 Aug 23 Sep 23 Oct 23 Nov 23 Dec 23
the UST benchmark. Average fees in 2023 for HY and IG a strong borrow for HY and IG lending, and higher stock
bonds topped out at levels nearly double where credit prices to pair with strong special lending fees for those well- Group Lendable On-Loan Balance
bond lending has traded in prior periods of near-zero rate shorted sectors like EV, Biotech, Meme stocks and hopefully
environment and with tailwinds from the Federal Reserve a few new sector shorts!
and its Quantitative Easing (QE) policy.