WASHINGTON (MNI) – The following is the summary of the Federal
Reserve’s December Senior Credit Officer Opinion Survey on Dealer
Financing Terms, published Thursday:

Summary

The December 2011 Senior Credit Officer Opinion Survey on Dealer
Financing Terms collected qualitative information on changes over the
previous three months in credit terms and conditions in securities
financing and over-the-counter (OTC) derivatives markets. In addition to
the core set of questions, this survey included special questions
dealing with three topics of current interest. The first set of special
questions asked respondents about the liquidity and functioning of
markets for U.S. Treasury securities and equities. The second set of
special questions focused on changes in the aggregate limits on
counterparty credit exposure applied by dealers to other financial
institutions. A final set of special questions queried respondents about
clients efforts to negotiate credit terms for trades cleared through
central counterparties. The 20 institutions participating in the survey
account for almost all of the dealer financing of dollar-denominated
securities for nondealers and are the most active intermediaries in OTC
derivatives markets. The survey was conducted during the period from
November 15, 2011, to November 28, 2011. The core questions asked about
changes between September 2011 and November 2011.

Responses to the December survey indicated a broad but moderate
tightening of credit terms applicable to important classes of
counterparties over the past three months. This tightening was
especially evident for hedge fund clients, trading real estate
investment trusts (REITs), and nonfinancial corporations.

With regard to OTC derivatives, respondents to the December survey
indicated that nonprice terms incorporated in new or renegotiated OTC
derivatives master Of note, respondents reported an increase in the
degree to which more-favorable terms were offered to most-favored
clients across most client types. In addition, all but two firms
reported an increase in the amount of resources and attention devoted to
the management of concentrated exposures to dealers and other financial
intermediaries, as well as to central counterparties and other financial
utilities, over the past three months. These responses reflect an
apparent continuation and intensification of developments already in
evidence in the September survey. With respect to a special question on
aggregate counterparty credit limits to other financial institutions, 80
percent of dealers reported having decreased limits for some specific
counterparties.

Trading REITs invest in assets backed by real estate rather than
directly in real estate assets. Board of Governors of the Federal
Reserve System agreements were for the most part little changed, on net,
during the past three months. However, a small net fraction of
respondents reported that they had imposed more-stringent requirements,
timelines, and thresholds for posting additional margin.

With respect to securities financing, survey respondents reported
a general tightening over the past three months of the funding terms
applicable to the securities types included in the survey. Tightening
was more pronounced for average clients than for most-favored clients.
For each of the types of collateral covered in the survey, notable net
fractions of respondents reported that liquidity and functioning had
deteriorated over the past three months in the underlying asset market.
With regard to conditions in those markets generally deemed the most
liquid, responses to a set of special questions suggested that liquidity
and functioning in the market for U.S. Treasury securities were little
changed since the second quarter, while a small net fraction of dealers
reported that conditions in equity markets had deteriorated somewhat
over the same period. With respect to initial margin, which falls
outside the scope of master agreements, small net fractions of dealers
reported an increase in requirements applicable to many underlying
collateral types (underlyings) over the past three months. Finally, in
response to a set of special questions on clients efforts to negotiate
terms applicable to trades cleared through 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.

** Market News International Washington Bureau: 202-371-2121 **

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