German securities lending revenues have slumped this year
after authorities challenged the legality of dividend arbitrage
trades and pushed to end the practice.
Data from IHS Markit shows revenues have slumped by 62% in
the country, mainly down to the disappearance of div-arb
trades, also known as "yield enhancement".
Often transactions involve large foreign investors lending
out their holdings of stocks, engineered by banks, so they are
not on their books at dividend time.
The practice isn’t illegal but is increasingly
under the media and regulatory microscope, particularly given
the public focus on tax avoidance in a time of austerity.
New laws in Germany force mutual/retail funds to pay a
corporate tax rate of 15% on Germany-sourced income, including
dividends, from securities lending and repos.
There are also no tax benefits for dividends unless
investors meet certain requirements under the so-called 45-day
rule, which means shares must be held for 45 days before and
after the dividend ex-date.
"The unwinding of the German yield enhancement trade, which
has seen the year to date revenues generated by German equities
shrink by a massive 62%, has put a $230m hole in the
industry’s revenue," said IHS Markit analyst Simon
Overall European securities lending revenues are roughly
$115m behind the same point last year; at this pace revenues
are set to miss last year’s tally by 7%. Germany
is the main contributing factor behind the decline.
"We’ve significantly reduced lending of German
stocks held by our German clients," Holger Genuneit,
director agency securities lending, Deutsche Bank told audience
members at at a Global Investor/ISF event earlier this year.
"We don’t want clients to run into a fiscal
disadvantage due to the tax changes."
"Germany has taken a big hit," added Mark Tidy, managing
director, JPMorgan Agent Lending. "However, our portfolios are
typically global in nature and other markets and transactions
have compensated. Lending revenues in Korea, Japan and the UK,
for example, are bright spots."
John Arnesen, global head of agency lending and BNP Paribas
Securities Services, admitted conditions had been difficult in
Germany, adding that there is now a greater focus on exactly
how trades will be structured going forward.
"We’re concentrating on developing alternative
and innovative ways of generating revenue for our German
clients, particularly around corporate action optimisation," he
said. "Collateral also matters more than ever before, which
means accepting different types of collateral and understanding
the associated risks is crucial to revenue generation."