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Credit Officers Speak Out in Fed Survey

Credit officers are weighing in on the current state of the markets, credit terms, securities financing, and over-the-counter (OTC) derivatives in a recent opinion survey.


The ""Federal Reserve's"":www.federalreserve.gov/ September poll, dubbed the ""Senior Credit Officer Opinion Survey on Dealer Financing Terms"":http://www.federalreserve.gov/econresdata/releases/scoos.htm, evaluated multiple aspects of the present credit climate to determine what those working in the mortgage industry day-to-day are saying about recent changes initiated on Capitol Hill.

The Fed's survey also examined funding markets for ""Treasury"":www.treasury.gov/ securities, risk appetites, and the utilization of leverage and financing of assets traded by real estate investment trusts.

Twenty-one financial institutions participated in the poll, which took place between August 22 and September 2 and focused on alterations that occurred between June and August of this year.

The results were mixed, and a broad look at credit availability demonstrated no definitive direction in terms of easing versus tightening credit, which is a departure from June's findings that showed an overall loosening of credit across the board.

Seventy-five percent of dealers reported an increase in the resources and time being spent on handling the exposure to other dealers and financial intermediaries, and 50 percent said they were also contributing more attention to central counter-parties or other financial utilities.

OTC derivatives drew little change from the poll conducted in June, with non-price terms and re-negotiated OTC derivatives master agreements staying static.


Initial margin requirements remained stable as well, with little movement among underlying collateral types for average and favored consumers.

Securities financing queries showed a general tightening of terms, representing an alteration from June numbers which indicated greater easing of terms.

Additionally, dealers demand for funding corporate bonds and agency and non-agency residential mortgage-backed securities (RMBS) was on the uptick during the survey period.

In contrast to previous 2011 results, respondents noted a deterioration of the liquidity and functioning in the markets as it relates to the collateral types included in the survey.

The Fed's look at funding for U.S. Treasury securities demonstrated minimal change, but participants did indicate a drop in requests to fund those types of securities, as well as downward movement in liquidity and functioning of the market.

Questions dealing with the current risk environment showed that dealers' clients were becoming somewhat more risk averse, with a more significant decline seen among those related to hedge funds.

Around 50 percent of dealers saw a rise in hedge funds attempting to negotiate more-favorable price and non price terms.

Leverage within the REIT sector was shown to increase slightly during the survey based on results from the start of 2011.

Mutual funds, exchange-traded funds, pension plans, and endowments also demonstrated static numbers in terms of price and non price credit terms and leverage.

The Fed has been conducting these types of surveys since June of 2010, and while the structure of the survey remains largely consistent, additional detail was added to September's coverage to better evaluate certain types of counter parties and collateral offerings.

Questions covering the OTC derivatives were also changed somewhat in a nod to the market's current practice of using master agreements, specific to material credit terms and applicable throughout many types of transactions.