Results of the December 2022 Survey on credit terms and conditions in euro-denominated securities financing and over-the-counter derivatives markets (SESFOD)

13 January 2023

• Tighter credit terms and conditions offered by banks to investment funds in particular, mainly attributed to deterioration in market liquidity and functioning
• Increased overall demand for funding and demand for funding with maturity greater than 30 days in context of deteriorating liquidity conditions for most collateral types
• Market participants expressed confidence in their ability to act as market-makers in times of stress for almost all types of debt securities and for derivatives

On balance, overall credit terms and conditions tightened over the September-November 2022 review period across all counterparty types. Price and non-price terms tightened for all counterparty types, but in particular for investment funds. The overall tightening of credit terms and conditions − mainly attributed to a deterioration in market liquidity and functioning − continued the trend reported for the previous six quarters and was in line with the expectations expressed in the September 2022 survey. Overall credit terms are expected to tighten further over the review period from December 2022 to February 2023. The amount of resources dedicated to managing concentrated credit exposures increased during the September-November 2022 review period, continuing a development reported since the March 2022 SESFOD, while the use of financial leverage decreased for investment funds.

In the case of securities financing transactions, the maximum amount of funding offered against collateral in the form of euro-denominated collateral, on balance, decreased for convertible securities in particular but also for high-quality corporate bonds, asset-backed securities and covered bonds. As for the maximum maturity of funding, respondents reported a mixed picture. Haircuts applied to euro-denominated collateral either increased or remained unchanged, while financing rates/spreads increased for financing secured against all collateral types except convertible securities and equities. Survey respondents reported an increased overall demand for funding and demand for funding with a maturity greater than 30 days. The liquidity of all collateral types continued to deteriorate, with the largest percentage of respondents reporting a decrease in the liquidity of high-yield corporate bonds.

Turning to non-centrally cleared over-the-counter (OTC) derivatives, survey respondents reported that initial margin requirements for most OTC derivatives increased during the September-November 2022 review period, but reported only limited changes with respect to the other questions on non-centrally cleared OTC derivatives.

The December 2022 survey included a number of special questions about market-making activities. Survey respondents reported that market-making activities had decreased or remained unchanged for all types of debt securities except domestic government bonds and had increased for derivatives over the past year. They expected market-making activities to broadly increase in 2023. Respondents cited profitability of market-making activities as the main driver of a decrease in market-making activities over the last year. They identified the willingness to take on risk and the availability of balance sheet or capital as the main drivers of expected changes in market-making activities in the year ahead.

Respondents expressed confidence in their ability to act as market-makers in times of stress for almost all types of debt securities – except high-yield corporate bonds – and for derivatives. They thereby broadly confirmed their assessment of the past two years – with the important exception of asset-backed securities and high-yield corporate bonds, for which they expressed very low confidence. Willingness to take on risk remained the main reason for banks’ confidence in their ability to act as market-makers in times of stress.

The December 2022 SESFOD survey, the underlying detailed data series and the SESFOD guidelines are available on the European Central Bank’s website, together with all other SESFOD publications.

The SESFOD survey is conducted four times a year and covers changes in credit terms and conditions over three-month reference periods ending in February, May, August and November. The December 2022 survey collected qualitative information on changes between September 2022 and November 2022. The results are based on the responses received from a panel of 26 large banks, comprising 14 euro area banks and 12 banks with head offices outside the euro area.

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