Pre-election jitters in October gave way to a quick rally following President Donald Trump’s victory.
This in turn led to a harsh year-end drop off, which saw on-loan balance of equity borrowing drop by 8 percent in the final days of trading as buy-side firms scrambled to clear liquidity hurdles.
“Although the idea of banks and brokers managing to specific regulatory hurdles over key reporting dates is nothing new, the end of 2016 appears to have been more extreme,” according to ISLA’s sixth market report.
“Equity balances appear to be reduced disproportionately with priority being given to fixed income HQLA business.”
The market’s behaviour immediately before and after the US election mirrored that of around the UK’s EU referendum.
“Much like behaviour prior to the UK Brexit vote, we observed a return of US equity loans ahead of the new presidential appointment, suggesting some clear deleveraging and closure of open risk positions.”
“Trump’s appointment, however, saw a marked shift in sentiment as both supply and demand for this asset class rallied towards year-end.”
A closer looks at ISLA’s collected data reveals that, for the first time since the association began reporting on the lending market, the global value of on-loan government bonds matched that of equities on loan.
Government bonds and equities each accounted for 45 percent of the total on-loan value, as of 31 December.
ISLA’s report also reaffirmed the persistence of established trends in the market, including the dominance of pension funds and mutual funds on the lending side, which account for 66 percent of available assets.
Additionally, UCITS funds continue to struggle with their lending businesses, and represent a disproportionate relationship between supply and demand for securities in mutual funds.
“The increasingly restrictive regulatory environment facing many retail funds notably UCITS, which has led to a lack of appetite from borrowers to access securities from these lending clients, has become a permanent feature of borrower behaviour.”