The Federal Reserve released the September 2024 Senior Credit Officer Opinion Survey (SCOOS) on dealer financing terms, which collects qualitative information on changes in credit terms and conditions in securities financing and over-the-counter (OTC) derivatives markets between May 2024 and August 2024.
With regard to the credit terms applicable to, and mark and collateral disputes with, different counterparty types across the entire range of securities financing and OTC derivatives transactions, responses included:
- One-fifth of respondents indicated that price terms tightened somewhat for real estate investment trusts (REITs). For all other types of counterparties, dealers reported, on net, that both price and nonprice terms on securities financing transactions and OTC derivatives remained basically unchanged over the past three months.
- Close to one-fifth of respondents indicated that the intensity of efforts by hedge funds to negotiate more-favorable price and nonprice terms increased over the past three months.
- Across most counterparty types, small fractions of respondents indicated that the volume of mark and collateral disputes increased over the past three months. With respect to clients’ use of financial leverage, responses to the core questions revealed the following:
- One-fourth of dealers reported that REITs increased their use of financial leverage somewhat over the past three months. The use of financial leverage remained unchanged for all other types of clients.
With respect to securities financing transactions, respondents indicated the following:
- The terms on securities financing were reported as basically unchanged for most collateral types. One-fifth of dealers indicated an easing over the past three months of collateral spreads for non-agency residential mortgage-backed securities.
- Across all collateral types, the demand for funding and the demand for term funding remained basically unchanged. Unlike the past two quarters, the demand for funding of equities (including stock loans) has not increased.
- Dealers reported, on net, little change in the liquidity and market functioning across all types of securities.
- The volume, duration, and persistence of mark and collateral disputes remained basically unchanged over the past three months across all collateral classes.
In addition, dealers were asked to characterize the current use of volatility strategies and products by all clients. The responses indicated significant use across most client classes, most notably by hedge fund clients.
- More than one-half of respondents indicated that a large number of their hedge fund clients widely employ volatility strategies and products. Another one-third responded that volatility strategies and products are employed by some hedge fund clients or in some situations. About one-fourth of respondents reported that the use of volatility strategies and products by hedge fund clients has increased somewhat since the start of 2023.
- Regarding hedge fund clients, one-third of respondents indicated either that most clients are long volatility or that more clients have long positions than short positions in volatility. Only one dealer responded that more clients are net short than net long. Dealers indicated, on net, no change in positioning for hedge fund clients.
- For mutual funds, exchange-traded funds (ETFs), and separately managed accounts established with investment advisers, more than one-half of respondents indicated that volatility strategies and products are employed by some clients or in some situations. About one-half of respondents reported that the use by these clients has increased since the start of 2023.
- With regard to pension plans, endowments, and insurance companies, three-fifths of dealers reported that volatility strategies and products are either widely employed or employed by some clients or in some situations. On net, respondents indicated no change in use since the start of 2023.