The September 2022 Senior Credit Officer Opinion Surveyon Dealer Financing TermsSummaryThe September 2022 Senior Credit Officer Opinion Survey on Dealer Financing Terms collectedqualitative information on changes in credit terms and conditions in securities financing andover-the-counter (OTC) derivatives markets. In addition to the core questions, the surveyincluded a set of special questions about client trading activity and terms offered to clientsengaged in commodity derivatives trading. The 22 institutions participating in the surveyaccount for almost all dealer financing of dollar-denominated securities to non-dealers and arethe most active intermediaries in OTC derivatives markets. The survey was conducted betweenAugust 16, 2022, and August 29, 2022. The core questions asked about changes between May2022 and August 2022. 1Core Questions(Questions 1–79) 2With regard to the credit terms applicable to, and mark and collateral disputes with,different counterparty types across the entire range of securities financing and OTCderivatives transactions, responses to the core questions revealed the following: One-fourth of dealers reported that price terms on securities financing transactions andOTC derivatives offered to trading real estate investment trusts (REITs) and nonfinancialcorporations have tightened somewhat over the past three months (see the exhibit“Management of Concentrated Credit Exposures and Indicators of Supply of Credit”).Dealers cited deterioration in current or expected financial strength of counterparties asthe most important reason for tightening. One-fifth of dealers reported having tightenedprice terms for hedge funds. Worsening in general market liquidity and functioning aswell as reduced willingness of their institution to take on risk were cited as the mainreasons for the tightening. None of the dealers reported an easing of price terms for anycounterparty types. Over one-fifth of dealers, on net, reported that nonprice terms, such as haircuts,maximum maturity, or covenants, tightened somewhat for trading REITs andnonfinancial corporations since the previous survey. A smaller net fraction of dealersreported a tightening for hedge funds.For questions that ask about credit terms, net percentages equal the percentage of institutions that reportedtightening terms (“tightened considerably” or “tightened somewhat”) minus the percentage of institutions thatreported easing terms (“eased considerably” or “eased somewhat”). For questions that ask about demand, netfractions equal the percentage of institutions that reported increased demand (“increased considerably” or “increasedsomewhat”) minus the percentage of institutions that reported decreased demand (“decreased considerably” or“decreased somewhat”).2Question 80, not discussed here, was optional and allowed respondents to provide additional comments.1
With respect to clients’ use of financial leverage, a net fraction of one-fifth of dealers indicateddecreased use of leverage by hedge funds, continuing a trend of decreasing hedge fund leverageobserved in several recent surveys (see the exhibit “Use of Financial Leverage”). Meanwhile,respondents noted that the use of leverage by other client types was basically unchanged.With regard to OTC derivatives markets, responses to the core questions revealed thefollowing: One-fifth of dealers reported that initial margin requirements for average clientsincreased somewhat over the past three months for commodity derivatives and totalreturn swaps referencing nonsecurities, and a smaller fraction of dealers reported suchincreases for foreign exchange derivatives. Initial margin requirements were reported tobe mostly unchanged for other types of OTC derivatives. One-fifth of dealers reported an increase in the duration and persistence of mark andcollateral disputes relating to OTC equity derivatives. The volume, duration, andpersistence of mark and collateral disputes relating to other types of OTC derivativesremained unchanged on net.With respect to securities financing transactions, respondents indicated the following: Net fractions of two-fifths, one-third, and one-fifth of dealers reported a tightening offunding terms with respect to collateral spreads, haircuts, and maximum maturity,respectively, for average clients in non-agency residential mortgage-backed securities(RMBS). One-third of dealers, on net, reported a tightening with respect to haircuts andcollateral spreads for consumer asset-backed securities. Small net fractions of dealers reported a tightening of funding terms across alldimensions for agency RMBS and commercial mortgage-backed securities (CMBS).One-fifth of respondents, on net, reported a tightening of collateral spreads for CMBS.One-fourth of respondents indicated that collateral spreads for financing high-yield bondshave tightened. Demand for funding was largely unchanged for all asset classes (see the exhibit“Measures of Demand for Funding and Market Functioning”). A net fraction of one-fifth of dealers indicated that liquidity and market functioning fornon-agency RMBS and CMBS deteriorated over the past three months. 3Note that survey respondents were instructed to report changes in liquidity and functioning in the market for theunderlying collateral to be funded through repurchase agreements and similar secured financing transactions, notchanges in the funding markets themselves. This question was not asked with respect to equity markets in the corequestions.3
Special Questions on Commodity Derivatives(Questions 81–94)Special questions asked dealers about client trading activity and terms offered to clients engagedin commodity derivatives trading.Almost two-thirds of dealers responded that they have financial clients for whom commodityderivatives account for a substantial share of their trading activity. With regard to commodityderivatives trading by these financial clients and the terms offered them, these respondentsindicated the following changes relative to the beginning of 2022: Net fractions of one-fourth and two-fifths of respondents indicated a tightening of priceand nonprice terms, respectively, for financial clients. For centrally cleared derivatives positions, dealers may require clients to post additionalinitial margin beyond that required by central counterparties. Almost two-thirds ofrespondents reported that they increased the amount of additional initial margin theyrequire from financial clients. On net, one-half of respondents reported that the total use of commodity derivatives byfinancial clients had increased. Two-fifths of respondents reported that the uncleared share of commodity derivativestransactions by financial clients had increased, and none reported a decrease. An increasein initial margin for cleared commodity derivatives relative to uncleared commodityderivatives was the most cited reason for this development. Some dealers cited anincrease in expected variation margin flows for cleared commodity derivatives relative touncleared commodity derivatives and a higher demand for customization as importantreasons.Three-fifths of dealers indicated that they have nonfinancial clients—for example, commoditytraders, producers, and consumers—for whom commodity derivatives account for a substantialshare of their trading activity. With regard to commodity derivatives trading by thesenonfinancial firms and the terms offered to them, these respondents indicated the followingchanges relative to the beginning of 2022: One-half and one-third of respondents noted a tightening of price and nonprice terms,respectively, for nonfinancial clients. One-fourth of respondents reported that they increased the amount of additional initialmargin that they require from nonfinancial clients for centrally cleared derivativespositions. The remaining respondents indicated that the amount of additional margin hadnot changed. Respondents, on net, indicated that the total use of commodity derivatives bynonfinancial clients remained unchanged. Only a small net fraction of respondents
reported an increase in the uncleared share of commodity derivatives transactions bynonfinancial clients.This document was prepared by Yesol Huh, Division of Research and Statistics, Board ofGovernors of the Federal Reserve System. Assistance in developing and administering thesurvey was provided by staff members in the Capital Markets Function, the Statistics Function,and the Markets Group at the Federal Reserve Bank of New York.
Management of Concentrated Credit Exposures and Indicators of Supply of CreditRespondents increasing resources and attention to management of concentrated exposures to the following:Net percentageQuarterly100Net percentageQuarterlyDealersCentral counterparties808060604040202000 202010201220141002016201820202022 202011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Respondents tightening price terms to the following:Net percentageQuarterlyHedge fundsMutual funds Trading REITs 100Net percentageQuarterlyInsurance companiesSeparately managed accounts Nonfinancial corporations801008060604040202000 20 20 402011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 ondents tightening nonprice terms to the following:Net percentageQuarterlyHedge fundsMutual funds Trading REITs 10080Net percentageQuarterlyInsurance companiesSeparately managed accounts Nonfinancial corporations8060604040202000 20 20 402011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022100 402011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Note: REIT is real estate investment trust. The question was added to the survey in September 2011.Source: Federal Reserve Board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.
Use of Financial LeverageRespondents reporting increased use of leverage by the following:Net percentageQuarterly60Net percentageQuarterlyHedge fundsTrading REITs4040202000 20 20 40 40 60 60 80 80 1002011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Net percentageQuarterly et percentageQuarterlyInsurance companies201320142015Separately managed accounts201620172018201920202021105500 5 5 10 102022Net percentageQuarterlyMutual fundsExchange traded funds t percentageQuarterlyPension 0212022201510105500 5 5 10 10 15 15 20 20 2520121510 15201260 252012201320142015Note: REIT is real estate investment trust.Source: Federal Reserve Board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.2016201720182019202020212022
Measures of Demand for Funding and Market FunctioningRespondents reporting increased demand for funding of the following:Net percentageQuarterlyHigh grade corporate bondsHigh yield corporate bonds 80Net percentageQuarterlyEquitiesCMBS 60604040202000 20 20 4020122013201420152016201720182019202020212022Net percentageQuarterlyAgency RMBSNon agency RMBS t percentageQuarterly2013201420152016201780Consumer ABS 60604040202000 20 20 4020128020182019202020212022 ondents reporting an improvement in liquidity and functioning in the underlying markets for the following:Net percentageQuarterlyHigh grade corporate bondsHigh yield corporate bonds CMBS 80Net percentageQuarterlyAgency RMBSNon agency RMBS Consumer ABS 60604040202000 20 20 40 40 60 60 80 80 1002012201320142015201620172018201920202021202280 e: CMBS is commercial mortgage backed securities, RMBS is residential mortgage backed securities, and ABS is asset backed securities. The question was added to the survey in September 2011.Source: Federal Reserve Board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.
One-fifth of dealers reported that initial margin requirements for average clients increased somewhat over the past three months for commodity derivatives and total return swaps referencing nonsecurities, and a smaller fraction of dealers reported such increases for foreign exchange derivatives. Initial margin requirements were reported to