Short-selling bans take their toll on securities finance revenues in 2020

Short-selling bans, lower market volumes, and depressed fees result in an 11% drop in securities finance revenues during 2020.

The global securities finance industry generated $7.66 billion in revenue for lenders in 2020, representing an 11.6% decrease from the previous year as the fallout from the pandemic hit the sector.

Securities lending revenue is calculated as the amount paid by borrowers – typically broker-dealers – on behalf of their hedge fund clients, to temporarily borrow equity and fixed income securities from long-holders of these assets, known as beneficial owners.

The statistics – released by DataLend, the market data division of EquiLend – showed the biggest declines were seen across Asia-Pacific (APAC) and Europe, at 26.8% and 19.2% respectively. These were regions that saw the strictest short-selling bans installed in response to heightened market volatility during the second quarter of 2020.

In Europe, there were short-selling bans by Austrian, Belgian, Greek, French, Italian and Spanish regulators, while Malaysia, Thailand, and South Korea were among the APAC markets which took similar action.

Conversely, the decline in lender-to-broker revenue was only 3.4% in the Americas.

“Over the first half of the year, declining market values led to lower on-loan volumes in the equity markets, while short-selling bans in Europe and Asia resulted in suppressed demand and general fee compression,” said Nancy Allen, global product owner of DataLend.

“In the Americas, while equity loan values declined year over year, average fees increased driven by a number of COVID- and non-COVID related names trading at very high fees to borrow.

“However, as the year progressed, short positions in U.S. equities dropped to significant lows as markets not only rebounded but hit record highs. As a result, the lending market experienced depressed fees and on-loan balances, which drove the considerable decline in revenue. As we approached the year-end, equity lending revenue in the Americas and EMEA did increase as there was a slight uptick in short activity.”

The annual figure represents an 11.6% decrease from the $8.66 billion generated for lenders in 2019 and a 20.7% decrease over the $9.96 billion in record-setting 2018.

Global broker-to-broker activity, where broker-dealers lend and borrow securities from each other, totalled an additional $2.87 billion in revenue in 2020, a 1.6% decrease year-over-year.

Across fixed income globally, corporate debt was down 37%, while government debt finished the year up 15.3% relative to 2019.

The short-selling bans seen in the first half of the year became a contentious subject – prolonging a debate that has rumbled on for years about the benefits of the practice.

In April, a new report from the World Federation of Exchanges (WFE) outlined that academic research ‘almost unanimously’ points towards the bans being disruptive for the orderly functioning of markets.

The organisation added that the bans will fail to produce the intended results unlike other safeguards, such as circuit breakers. Regulatory authorities in Europe said at the time of imposing the restrictions that it was due to the serious threat to market confidence at the height of the COVID-19 crisis.