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The European Equity Lending Market: Exclusive Security Lending Agreements

Analyses

Gepubliceerd: 11 april 2023

Sufficient security lending supply is crucial for short selling which eliminates arbitrage opportunities, ensuring that the law of one price holds in financial markets. Consequently, market disruptions due to the lack of such supply, typically referred to as short sale constraints, have been widely studied. The overall conclusion is that limits to short selling reduce market liquidity and slow the speed of price discovery. A well-functioning equity lending market is, thus, fundamental to ensure financial market efficiency.

We provide a first overview of the European equity lending market using deal-level granular data reported under the Securities Financing Transactions reporting (SFTR) with a particular focus on exclusive security lending agreements (ESLAs). The market volume covered in this data set is well over 4 trillion euro annually. We find, first, that equity lending market participants can be broadly divided into four categories: private and corporate lenders that lend out part of their equity portfolio, broker-dealers that both borrow on their own behalf as well as on the behalf of corporate and private ultimate borrowers, and traders that borrow and lend but just for their own account. Second, both broker-dealers and traders enjoy positive bid-ask-spreads between their lending and borrowing transactions. However, broker-dealers are on average substantially more profitable than traders. Third, the difference in profitability is partially driven by broker-dealers’ use of ESLAs giving them exclusive access to their clients’ portfolios. The 35.0% of clients with an ESLA experience on average both lower trading volume and lending fees but are relatively more collateralized.

DNB Analyse - The European Equity Lending Market: Exclusive Security Lending Agreements

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