(April 18, 2012) — Revenue earned by investors for lending out their portfolio securities has hit a record high, research has found, as income from re-investment has been hit by actions from European financial regulators.
The average fee paid to borrow stocks reflecting the Russell 3000 has risen to an all-time high of over 100 basis points, market monitor Data Explorers said today. In 2009, the average fee paid was 40 basis points.
Will Duff-Gordon, Research Director at Data Explorers, said: “The total daily return from lending across all asset classes is both on an upward trajectory as well as being consistently greater than $20 million for the first time in three years.”
Duff-Gordon said the figure was based on revenues outside dividend periods, which can skew results, to gauge a sense of the baseline income.
“It goes without saying that this relates to a rising intrinsic lending fee for easy to borrow names and the custodians have, understandably, implemented this as a way to protect their income. By process of elimination one could get a sense of this since Beneficial Owners are, in the main, not keen on chasing cash re-investment risk in order to boost lending income, ” Duff-Gordon said.
This year the weighted average lending fee was around 35 basis points whereas in 2009/10 it was more like 25 basis points – a rise of 40%.
This increase in fee revenue has helped to offset a slip in income earned from reinvestment of cash collateral held by the lender.
The European Central Bank’s (ECB) Long-Term Refinancing Operations has ensured that there are fewer available assets that would be suitable for cash reinvestment available to buy. The operation saw an amnesty of corporate bonds, asset-backed securities, and other instruments that yield more than sovereign debt by European banks in return for cash.
Several custodians got in to trouble with their investors over the financial crisis as their cash-reinvestment funds created to be ultimately liquid turned out to be less so, burning investors wanting to exit.
The topic will be debated more widely at the Data Explorers conference in New York in May.