The December 2011 Federal Reserve “Senior Credit Officer Opinion Survey on Dealer Financing Terms” (link is here) was released without much fanfare. While “remained basically unchanged” was clearly the most popular survey answer chosen, if you looked hard enough, there were some subtle shifts and interesting trends. The important messages that came across were: 1.) credit has tightened overall but dealers are still engaging their best clients aggressively, 2.) the use of leverage by hedge funds has weakened slightly, 3.) demand for financing beyond 30 days, especially for corporate debt, has gone up at the same time there has been a deterioration in market liquidity, and 4.) increased attention is being paid to managing exposures to other dealers and financial counterparties.
Here are some sound bites from the analysis:
“a broad but moderate tightening of credit terms applicable to important classes of counterparties over the past three months”
“an increase in the degree to which more-favorable terms were offered to most-favored clients across most client types” and “tightening was more pronounced for average clients than for most-favored clients”
With regard to central counterparties, “dealers indicated that most-favored hedge funds were the counterparty type most intensively seeking to obtain terms that entail lower margin requirements or that provide protection against changes in such requirements”
“In the December survey, all but two respondents reported that the amount of resources and attention devoted to management of concentrated exposures to dealers and other financial intermediaries had increased over the past three months. In the September survey, three-fourths of respondents noted such an increase.”
“On net, about one-third of dealers reported having tightened price terms (such as financing rates) offered to hedge funds, and one-fourth reported having tightened nonprice terms (including haircuts, maximum maturity, covenants, cure periods, cross-default provisions, or other documentation features) across the spectrum of securities financing and OTC derivative transactions.”
“More than one-half of dealers, on balance, indicated that hedge funds’ use of financial leverage, considering the entire range of transactions with such clients, had decreased somewhat over the past three months.”
“As in September 2011, survey respondents indicated a general tightening over the past three months of credit terms under which the types of securities included in the survey are financed. This tightening was especially evident for the financing of corporate bonds (both high grade and high yield), agency and non-agency residential mortgage-backed securities (RMBS), and commercial mortgage-backed securities.”
“…demand for term funding with a maturity greater than 30 days increased for all types of securities. Most notably, 40 percent of respondents reported an increase in demand for term funding of high-grade corporate bonds while about one-third of respondents, on net, reported increased demand with regard to agency RMBS and high-yield corporate bonds in the December survey.”
“Four-fifths of respondents indicated that counterparty credit limits had decreased, but only for some specific institutions, while the rest of the respondents reported no change in these limits. Respondents pointed to deterioration in the current or expected financial strength of other institutions and to increased strains in global financial markets as the most important reasons for the change in limits on counterparty credit exposure to other financial institutions.”