Fed’s senior credit officer survey checks the pulse on dealer financing terms from May-August for securities, OTC derivatives

A Federal Reserve survey conducted between Aug. 11 and Aug. 24 by the Federal Reserve show that price and nonprice terms on securities financing transactions and OTC (over-the-counter) derivatives from mid-May to August were generally unchanged across most classes of counterparties, a report shows.

The report gives results of the Fed’s quarterly Senior Credit Officers Opinion Survey, which focuses on dealer financing terms. The Fed said the 23 institutions included in the survey account for almost all dealer financing of dollar-denominated securities to non-dealers and are the most active intermediaries in OTC derivatives markets.

In reporting on price and nonprice terms on securities financing transactions and OTC derivatives, the Fed said a small net fraction of dealers reported easing of price terms offered to mutual funds, exchange-traded funds (ETFs), and separately managed accounts. “However, with regard to trading REITs [real estate investment trusts], about one-fifth of dealers, on net, indicated tightening of price terms and about two-fifths indicated tightening of nonprice terms,” the report said.

It said about one-third of respondents, on net, indicated an increase in resources and attention devoted to managing concentrated credit exposure to dealers and central counterparties. It also said initial margin requirements on OTC derivatives were basically unchanged, on net, for average and most-favored clients.

Among other results:

  • On securities financing transactions, respondents indicated that demand for funding remained largely unchanged for most asset classes. A net fraction of about one-third of dealers reported increased demand to fund equities, and similar net fractions of dealers reported increased demand for term funding of non-agency residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).
  • Terms under which various types of securities are funded have eased for most asset classes since the previous survey (focusing on changes between February and May), with a substantial portion of dealers reporting easing of funding terms for various types of securities.
  • About two-thirds of respondents, on net, indicated improved market liquidity and functioning for consumer asset-backed securities (ABS).

The Fed also reported on “special questions” on market functioning of CMBS and funding terms for commercial mortgage REITs. Among the findings: On net, dealers reported easing of funding terms since mid-March of both Term Asset-Backed Securities Loan Facility (TALF)-eligible and TALF-ineligible non-agency CMBS. Since mid-March, the report said, demand for funding remained largely unchanged, on net, for both TALF-eligible and TALF-ineligible non-agency CMBS.

It said that about one-third of dealers, on net, reported an improvement in liquidity and market functioning for TALF-eligible non-agency CMBS, while liquidity and market functioning was reported to be roughly unchanged for TALF-ineligible non-agency CMBS when compared with mid-March levels.

Senior Credit Office Opinion Survey, September 2020