WASHINGTON (MNI) – The following are excerpts of the summary text
of the Federal Reserve’s March 2012 Senior Credit Officer Opinion Survey
on Dealer Financing Terms covering most dollar-denominated financing and
over-the-counter derivatives through Feb. 27:

Responses to the March survey indicated little change, on balance,
in credit terms applicable to important classes of counterparties over
the past three months, in contrast to the broad but moderate tightening
reported in the December 2011 survey. About one-third of firms, on net,
reported an increase in the amount of resources and attention devoted to
the management of concentrated exposures to dealers and other financial
intermediaries.

In the previous survey, all but two respondents had noted such an
increase. More than one-half of respondents reported an increase in the
intensity of efforts by hedge funds to negotiate more-favorable credit
terms over the past three months, and a moderate net fraction of dealers
noted such an increase in efforts also on the part of mutual funds,
exchange-traded funds (ETFs), pension plans, and endowments. On net,
one-fifth of respondents, a smaller share than in the previous survey,
suggested that the use of financial leverage by hedge funds had
decreased somewhat during the past three months. In contrast, a small
net fraction of dealers pointed to an increase in the amount of leverage
used by trading real estate investment trusts (REITs).

With respect to OTC derivatives, respondents to the March survey
indicated that nonprice terms incorporated in new or renegotiated OTC
derivatives master agreements were, for the most part, little changed
during the past three months. Dealers also reported that initial margin
requirements, which fall outside the scope of master agreements, were
largely unchanged over the same period. However, a modest net percentage
of respondents indicated that the posting of nonstandard collateral
(that is, other than cash and U.S. Treasury securities) permitted under
relevant agreements had increased somewhat. In response to a special
question on client risk appetite, survey respondents indicated that the
risk appetite of most client types included in the survey was little
changed since the beginning of 2012. However, one-fifth of dealers, on
net, reported that the risk appetite of most-favored hedge funds had
increased somewhat during that period.

With regard to securities financing, survey respondents indicated
that the credit terms applicable to the securities types included in the
survey were generally little changed, on balance, over the past three
months.

Moderate net fractions of dealers reported that both overall demand
for funding as well as demand for term funding with a maturity greater
than 30 days had generally increased over the same period. Moreover,
dealers noted that liquidity and functioning in the underlying asset
markets had improved across all collateral types covered in the survey.

A special question asked about changes in the past six months in
the intensity of efforts by clients to negotiate arrangements for the
custody by third parties of collateral and margin posted to the
respondent’s institution to provide additional protection in the event
that the dealer faces distress. Two-thirds of respondents, on net,
pointed to an increase in such efforts, with a couple of dealers noting
that these efforts had increased considerably.

A final set of special questions focused on recent developments in
securities lending. One-fourth of respondents reported an increase over
the past six months in the amount of resources and attention devoted to
the management of credit exposure related to their posting of collateral
pursuant to securities borrowed (to facilitate their own trading
activities or on behalf of prime brokerage or other clients). Survey
respondents indicated significant heterogeneity, as of the beginning of
2012, in the share of the dollar volume of collateral posted pursuant to
securities borrowed that consisted of cash collateral; a modest fraction
of dealers reported an increase in the share of noncash collateral (that
is, securities) over the past six months. Finally, four-fifths of
respondents noted that securities lending programs administered by
custodian banks or other agents were the largest source, by volume, of
borrowed securities as of the beginning of 2012.

Counterparty Types

Dealers and other financial intermediaries. In the March survey,
about one-third of respondents, on net, indicated that the amount of
resources and attention devoted to management of concentrated credit
exposure to dealers and other financial intermediaries had increased
over the past three months. In the December survey, all but two
respondents reported such an increase.

Central counterparties and other financial utilities. More than
one-half of dealers indicated that the amount of resources and attention
devoted to management of concentrated credit exposures to central
counterparties and other financial utilities had increased over the past
three months. This fraction is similar to that observed in the previous
two surveys, and it is consistent with other indications that changes in
market conventions and practices associated with the increased clearing
of OTC derivatives trades mandated by the DoddFrank Wall Street Reform
and Consumer Protection Act continue to be a focus for risk managers at
dealer firms.

Hedge funds. The survey responses suggested that price and nonprice
terms applicable to hedge funds were little changed, on balance, over
the past three months. Only a few dealers reported having eased price
terms (such as financing rates) or nonprice terms (including haircuts,
maximum maturity, covenants, cure periods, cross-default provisions, or
other documentation features) offered to hedge funds across the spectrum
of securities financing and OTC derivatives transactions. The few
institutions that reported an easing of credit terms pointed to
more-aggressive competition from other institutions and an improvement
in general market liquidity and functioning as the reasons for doing so.
More than one-half of dealers, a larger fraction than in December,
reported an increase in the intensity of efforts by hedge funds to
negotiate more-favorable price and nonprice terms over the past three
months. Despite credit terms that were said to be little changed,
one-fifth of respondentsa smaller net share than in the December
surveysuggested that the use of financial leverage by hedge funds,
considering the entire range of transactions facilitated, had decreased
somewhat over the past three months. A similar fraction of dealers noted
that the availability of additional financial leverage under agreements
currently in place with hedge funds had also decreased somewhat.
Finally, a modest net fraction of respondents indicated that the
provision of differential terms to most-favored hedge funds had
increased somewhat over the past three months.

For the remaining counterparty types included in the survey, and
discussed in more detail below, nearly all of the dealers reported that
applicable price and nonprice terms were little changed during the past
three months. However, the few dealers that did report a change in
credit terms tended to point to an easing of terms.

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** MNI Washington Bureau: 202-371-2121 **

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