WASHINGTON (MNI) – The following is the second and final part of an
excerpt from the Federal Reserve’s new Senior Credit Officer Opinion
Survey published Tuesday. The survey provides information on credit in
the securities financing and the OTC derivatives market:

– Insurance companies, pension funds, and other institutional
investors.

Responses to questions about credit terms for insurance companies,
pension funds, and other institutional investors showed similar but more
muted trends. Small net fractions of dealers indicated that they had
loosened both price and nonprice terms for such counterparties over the
past three months. The three factors that were reported to have exerted
the greatest influence on dealers’ policies were improvement in the
current or expected financial strength of counterparties, improvement in
general market liquidity and functioning, and more-aggressive
competition from other institutions. More than one-third of respondents
indicated that the intensity of efforts by insurance companies, pension
funds, and other institutional investors to negotiate more-favorable
price and nonprice terms had increased over the past three months.
Looking forward over the next three months, more than one-half of
dealers anticipated that price and nonprice terms would remain basically
unchanged.

– Nonfinancial corporations.

The responses to questions about credit terms applicable to
nonfinancial corporations also suggest a loosening over the past three
months. Onefourth of dealers, on balance, reported a loosening of price
terms offered to these counterparties, while a small net fraction of
respondents indicated that they had eased nonprice terms. The most
important reasons cited for the loosening in credit terms were broadly
consistent with those for other counterparty types: Respondents pointed
to improvement in general market liquidity and functioning,
more-aggressive competition from other institutions, and improvement in
the current or expected financial strength of counterparties. Dealers
reported some pressure on terms from nonfinancial counterparties, with
one-half of survey respondents noting that the intensity of efforts to
negotiate more-favorable terms had increased over the past three months.
Looking forward, almost one-fifth of dealers, on net, expect a further
loosening of the price and nonprice terms under which they transact with
nonfinancial corporations.

Over-the-Counter Derivatives

(Questions 18-29)

Overall, the responses to the questions dealing with OTC
derivatives trades suggested little change over the past three months in
terms for plain vanilla and customized derivatives as well as in the
volume of mark and collateral disputes with clients across the various
underlyings — foreign exchange, interest rates, equities, credit,
commodities, and total return swaps referencing nonsecurities (such as
bank debt and whole loans).

Securities Financing

(Questions 30-46)

The most important trend evident from the responses to questions
dealing with securities financing related to demand for funding. Survey
respondents indicated that, on net, demand for funding generally
increased over the past three months. Of note, on balance, one-half of
the dealers that lend against other ABS and one-third of the respondents
that lend against agency RMBS reported an increase in demand for
funding.

Broad trends regarding changes in terms were more difficult to
discern from the dealer responses. However, certain specific changes in
terms were identified by several dealers. For example, small net
fractions of respondents reported having increased financing rates at
which high-grade corporate bonds are funded for both average and
most-favored clients over the past three months. By contrast, small net
fractions of dealers reported having lengthened the maximum maturity
under which equities are funded for both average and most-favored
clients. In the case of agency RMBS, small net fractions of survey
respondents indicated that they had eased a couple of terms (maximum
maturity and haircuts) for both average and most-favored clients. Small
net fractions of dealers active in other ABS reported a reduction in
haircuts applicable to both average and mostfavored clients.

Questions about liquidity and market functioning for various types
of collateral funded through repurchase agreements and similar secured
financing transactions, which are included in this section of the
survey, generally suggested no major change in the views of senior
credit officers. About one-fourth of respondents, however, indicated
that liquidity and functioning in the market for other ABS had
deteriorated over the past three months. There was no indication of an
increase in collateral and mark disputes with clients for funding of any
collateral, including other ABS.

Special Questions on the Stringency of Credit Terms Relative to the
End of 2006

(Questions 48-50)

Responses to these special questions pointed to significantly
tighter credit terms across counterparty and transaction types relative
to the end of 2006. All respondents but one characterized credit terms
applicable to hedge fund counterparties as currently tighter than in the
reference period. A significant majority of respondents provided an
analogous characterization of the current stringency of credit terms
applicable to insurance companies, pension funds, and other
institutional investors. By contrast, almost one-third of dealers noted
that the current stringency of credit terms applicable to nonfinancial
corporations was basically unchanged relative to the end of 2006. In
general, the vast majority of dealers reported tighter credit terms
relative to the end of 2006 with regard to both OTC derivatives and
securities financing transactions.

(2 of 2)

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

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