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Summary of the SESFOD Survey on Credit Terms and Conditions in Euro-Denominated Securities Financing and OTC Derivatives Markets

Core Content

The Survey on credit terms and conditions in euro-denominated securities financing and OTC derivatives markets (SESFOD) is a quarterly qualitative survey conducted by the Eurosystem. It is part of an international initiative aimed at collecting data on credit terms and conditions in global wholesale markets. The survey is designed to gather insights into trends and the drivers behind changes in credit terms, which are critical for financial stability, market functioning, and monetary policy.

Main Purpose

The survey focuses on credit terms and conditions in two key areas: securities financing and non-centrally cleared OTC derivatives. It collects data from large banks and financial institutions active in euro-denominated markets. The information is aggregated and shared with the European Central Bank (ECB) and potentially with the Bank for International Settlements (BIS).

Survey Structure

The survey is divided into three main sections:

1. Counterparty Types

• Objective: Assess changes in credit terms across different counterparty types.
• Counterparty Types Covered:
  • Banks and dealers
  • Hedge funds
  • Insurance companies
  • Investment funds, pension plans, and other institutional pools
  • Non-financial corporations
  • Sovereigns
• Key Terms Analyzed:
  • Price terms: Financing rates, spreads, and other compensation for credit risk.
  • Non-price terms: Haircuts, maximum maturity, covenants, triggers, and other contractual provisions.
• Questions Include:
  • Changes in credit terms over the past three months.
  • Expectations for the next three months.
  • Reasons for changes (e.g., counterparty financial strength, internal treasury charges, market liquidity).
  • Influence of CCP practices on bilateral transactions.
  • Changes in the management of concentrated credit exposures.
  • Changes in financial leverage usage by specific counterparty types.
  • Client pressure and differential terms for most-favoured clients.
  • Valuation disputes across counterparty types.

2. Securities Financing

• Objective: Analyze changes in credit terms for different collateral types.
• Collateral Types Covered:
  • Domestic government bonds
  • High-quality government, sub-national, and supra-national bonds
  • Other government, sub-national, and supra-national bonds
  • High-quality financial corporate bonds
  • High-quality non-financial corporate bonds
  • High-yield corporate bonds
  • Convertible securities
  • Equities (including stock loans)
  • Asset-backed securities
  • Covered bonds
• Key Credit Terms:
  • Maximum amount of funding
  • Maximum maturity of funding
  • Haircuts
  • Financing rate/spread
  • Use of CCPs
  • Covenants and triggers
• Market Conditions Assessed:
  • Demand for funding against collateral
  • Liquidity and functioning of the collateral market
  • Collateral valuation disputes

3. Non-Centrally Cleared OTC Derivatives

• Objective: Evaluate changes in credit terms and market conditions for non-centrally cleared derivatives.
• Derivative Types Covered:
  • Foreign exchange (FX)
  • Interest rate
  • Credit referencing sovereigns
  • Credit referencing corporates
  • Credit referencing structured credit products
  • Equity
  • Commodity
  • Total return swaps referencing non-securities
• Key Credit Terms:
  • Initial margin requirements
  • Maximum amount of exposure
  • Maximum maturity of trades
  • Liquidity and trading conditions
  • Valuation disputes
• Master Agreement Changes:
  • Margin call practices
  • Acceptable collateral
  • Recognition of portfolio and diversification benefits
  • Covenants and triggers
  • Other documentation features
• Non-Standard Collateral:
  • Changes in the posting of non-standard collateral (e.g., not cash or high-quality government bonds)

Key Information

• The survey is quarterly, with data collected for reference periods ending in February, May, August, and November.
• Confidentiality: Individual institution data is kept confidential; only aggregate results are published.
• Reporting Entities: Large banks and financial institutions, with euro-area-headquartered entities reporting to their national central bank, which then forwards data to the ECB.
• Focus on Euro-Denominated Instruments: Responses should be based on euro-denominated transactions, though comments on other currencies are encouraged.
• Survey Perspective: Firms are to report from the supplier of credit perspective, not as receivers.
• Comment Section: Allows for additional insights on market developments not covered in the structured questions.

Conclusion

The SESFOD survey provides a comprehensive overview of credit terms and conditions in euro-denominated markets, with a focus on securities financing and OTC derivatives. It aims to capture trends, drivers, and expectations across various counterparty types and collateral/derivative categories, offering valuable data for financial regulation and policy-making.