WASHINGTON (MNI) – The following is the second and final section of
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:

Trading real estate investment trusts.

Nearly all of the survey respondents reported that price and
nonprice terms offered to trading REITs had remained basically unchanged
over the past three months. A modest net fraction of dealers indicated
that the use of financial leverage by trading REITs had increased
somewhat over the same period.

Mutual funds, exchange-traded funds, pension plans, and endowments.
The survey responses suggested that, on balance, there had been little
change in price and nonprice terms offered to mutual funds, ETFs,
pension plans, and endowments during the past three months. Of note,
one-third of respondents stated that the intensity of efforts by clients
in this category to negotiate more-favorable credit terms had increased
somewhat over the same period. A modest net fraction of respondents
indicated that the provision of differential terms to most-favored
mutual funds, ETFs, pension plans, and endowments had increased somewhat
over the past three months.

Insurance companies. Dealers reported that price and nonprice terms
applicable to insurance companies had remained basically unchanged over
the past three months despite a continued increase in the intensity of
efforts by such clients to negotiate more-favorable credit terms.

Separately managed accounts established with investment advisers.

Nearly all of the dealers indicated that price and nonprice terms
negotiated by investment advisers on behalf of separately managed
accounts were basically unchanged during the past three months. A couple
of respondents noted an increase in the intensity of efforts by such
clients to negotiate more-favorable credit terms.

Nonfinancial corporations

Survey respondents reported that, on balance, price and nonprice
terms offered to nonfinancial corporations had changed little over the
past three months. One-fourth of respondents, however, indicated that
the intensity of efforts by nonfinancial corporations to negotiate
more-favorable terms had increased somewhat over the past three months.

Mark and collateral disputes

Nearly all of the respondents stated that the volume, duration, and
persistence of mark and collateral disputes with each counterparty type
included in the survey were basically unchanged over the past three
months.

One or more dealers reported an easing of price or nonprice credit
terms for trading REITs, separately managed accounts established with
investment advisers, and nonfinancial corporations, as well as mutual
funds, ETFs, pension plans, and endowments.

—

Special Question on Client Risk Appetite

Anecdotal reports suggested that investor risk appetite declined
during the final months of 2011. A special question asked about changes
in respondents’ overall assessment of the risk appetite of different
client types since the beginning of 2012. Survey respondents indicated
that the risk appetite of most types of clients included in the survey
was little changed, on balance, during this period. However, one-fifth
of dealers reported that most-favored hedge funds risk appetite had
increased somewhat.

Special Question on Third-Party Custody of Independent Amounts
(Initial Margin) and Collateral

Following the failure of MF Global in October, market participants
have reportedly focused more intensively on the possible consequences of
financial distress on the part of dealers with whom they have posted
collateral. A special question asked about changes in the past six
months in the intensity of efforts by respondents clients to negotiate
arrangements for the custody by third parties of collateral and margin
posted to the respondent’s institution as a risk mitigant. Two-thirds of
dealers, on net, pointed to an increase in such efforts, with a couple
of respondents noting that these efforts had increased considerably.

Special Questions on Developments in Securities Lending

During the 2007-08 financial crisis, some beneficial owners of
securities (for example, pension funds or insurance companies)
experienced losses related to the reinvestment of cash collateral posted
by borrowers of their securities, which highlighted the associated
counterparty risk faced by the borrowers posting collateral.7 financing
transactions, not changes in the funding market itself. This question is
not asked with respect to equity markets in the core questions. Since
the crisis, the volume of securities lending has decreased considerably
and cash collateral reinvestment practices are said to have changed
significantly, including through application of more-stringent
investment guidelines for cash collateral by beneficial owners and the
increased posting of other securities as noncash collateral. A final set
of special questions asked dealers about recent developments in
securities lending.

One-fourth of dealers reported that the amount of resources and
attention devoted to the management of credit exposure related to their
posting of collateral with beneficial owners pursuant to securities
borrowed (to facilitate their own trading activities or on behalf of
prime brokerage or other clients) had increased over the past six
months.8

Dealers were also queried about the sources of securities borrowed
by their firm as of the beginning of 2012. Four-fifths of respondents
reported that securities lending programs administered by custodian
banks or other agents on behalf of beneficial owners were the largest
source, by volume, of borrowed securities; the remaining respondents
pointed to their clients (typically through rehypothecation) or direct
transactions with beneficial owners.

In response to a question about changes over the past six months in
the volume of securities borrowed by source type, about one-fifth of
respondents indicated that the volume of securities borrowed from
securities lending programs administered by custodian banks or other
agents had decreased somewhat. Little to no change, on balance, was
reported with regard to securities borrowed through rehypothecation and
direct transactions with beneficial owners.

Survey responses indicated significant heterogeneity, as of the
beginning of 2012, in the share of the dollar volume of collateral that
dealers had posted pursuant to securities borrowed that consisted of
cash collateral. About one-half of dealers indicated that cash accounted
for more than 80 percent of the collateral they had posted pursuant to
such transactions. Meanwhile, about one-fourth of respondents noted that
cash consisted of between 60 and 70 percent of the collateral they had
posted pursuant to securities borrowed, and about one-fifth reported a
share of cash collateral of less than 60 percent. Of note, a modest
fraction of dealers reported that the share of their collateral posted
pursuant to securities borrowed that consisted of securities rather than
cash had increased somewhat over the past six months. represented a
significant share of the return to beneficial owners for lending
securities.

(Footnotes have been excluded.)

(end – 2 of 2)

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

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