Responses to the core questions in the June survey offered a few insights into recent changes in the terms under which dealers facilitate their clients’ securities and derivatives transactions. 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 to the core questions revealed the following:
A substantial fraction of respondents indicated having tightened price and nonprice terms on securities financing transactions and OTC derivatives across all classes of counterparties. In particular, more respondents (roughly four-fifths) indicated so for hedge funds and trading REITs than for other client types. Across all counterparty types, the net fractions of respondents reporting tightened price and nonprice terms were at the highest levels since the survey began in 2011. In addition, more than half of respondents indicated dedicating increased resources and attention to managing concentrated credit exposure to dealers and central counterparties.
A substantial fraction of respondents indicated increased volume and duration of mark and collateral disputes for most counterparty types, and more respondents indicated so for dealers, hedge funds, and trading REITs than for other client types.
With regard to OTC derivatives markets, responses to the core questions revealed the following:
While nonprice terms in master agreements for OTC derivatives remained largely unchanged, dealers responded that initial margin requirements on OTC derivatives increased, on net, for both average and most-favored clients. The portion of dealers indicating increased initial margin requirements varied across different types of OTC derivatives, with the largest fraction (two-thirds) of dealers indicating so for OTC credit derivatives referencing securitized products.
The volume and duration of mark and collateral disputes increased, on net, across all types of OTC derivatives, with varying net portions of respondents (ranging from one-sixth to one-half) indicating increases in the volume and duration of such disputes.
With respect to securities financing transactions, respondents indicated the following:
A net fraction of more than one-half of dealers reported increased demand for funding of investment-grade bonds, high-yield bonds, non-agency residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and consumer asset-backed securities (ABS) (see the exhibit Measures of Demand for Funding and Market Functioning). The net fractions are record highs (since the survey began in 2011) for investment-grade bonds, high-yield bonds, CMBS, and consumer ABS. By contrast, a net fraction of approximately one-third of dealers reported decreased demand to fund equities. For agency RMBS, dealers reported no changes in funding demand on net.
A substantial portion of dealers reported tightening funding terms for various types of securities. In particular, most dealers reported tightened terms for financing non-agency RMBS, CMBS, and consumer ABS.
The volume and duration of mark and collateral disputes increased, on net, across all collateral types, with a net fraction of more than one-half of respondents indicating increases in the volume and duration of disputes involving non-agency RMBS and CMBS.
A substantial portion of respondents indicated deteriorated liquidity and functioning across all types of markets except for the equity market. More than four-fifths of respondents indicated so for the non-agency RMBS and CMBS markets, and more than one-half did for the high-yield bond and consumer ABS markets.3