The Desk has analyzed the December 2024 survey on credit terms and conditions in euro-denominated securities financing and OTC derivatives markets (SESFOD), which provides qualitative insights into developments between September and November 2024. the ECB reported on the 20th of January 2025 that “overall credit terms and conditions tightened somewhat” during the review period. Market-making activities, particularly for debt securities, expanded during the same time, with a net 50% of respondents expecting further growth in 2025.
The survey highlights changes in credit terms, particularly in securities financing and OTC derivatives markets, with adjustments observed across price and non-price terms. Respondents attributed this to “a deterioration in general market liquidity” for securities financing, and adjustments in margin requirements and haircuts. For counterparty-specific developments, while terms for hedge funds and non-financial corporations tightened, conditions for banks and dealers remained stable or eased. Financing demand increased across all collateral types, with a significant net percentage of respondents reporting higher maximum funding amounts for domestic government bonds, equities, and covered bonds.
Specific Developments in Rates
The SESFOD survey notes “a persistent deterioration in the functioning of collateral markets,” particularly for high-quality government bonds. Financing rates or spreads increased across all collateral types, with a net 14% of respondents observing a rise for domestic government bonds. Despite these pressures, the maximum maturity for funding secured against government bonds increased slightly, reflecting ongoing demand for such instruments. Liquidity challenges were attributed to higher haircuts and stricter non-price terms, although respondents indicated no major changes in the use of central counterparties (CCPs) for securities financing transactions.
Market-making activities in government bonds were strong, with a net 36% of respondents anticipating growth in this area in 2025. Institutions cited improved risk appetite, profitability, and advancements in electronic trading platforms as key drivers. Specifically, 12% of respondents identified profitability as the most important factor driving increased participation in government bond markets. Confidence in market-making capacity remained robust, with 88% of respondents rating their ability to act as market-makers during stressed conditions as moderate to good.
Specific Developments in Credit
Terms tightened the most for the credit markets, with a net 5% of respondents reporting higher haircuts for high-yield corporate bonds. Financing rates for these instruments also increased, while the maximum amount of funding secured against high-quality corporate bonds remained unchanged. Demand for credit-backed financing grew, with a net 29% of respondents observing an uptick in market-making activity for high-quality financial and high-yield corporate bonds. Profitability was again a significant driver, with 14% of respondents citing it as the primary motivator for increased participation in credit markets. This trend aligns with market makers’ expectations for further expansion in 2025.
Structural changes were evident in the shift toward greater reliance on CCPs for credit derivatives trading. A net 11% of respondents reported increased use of central clearing, which contributed to tighter covenants and higher margin requirements. These changes reflect an emphasis on risk mitigation through enhanced collateralization. Respondents also highlighted that adjustments to credit terms were influenced by counterparty-specific factors, such as financial strength and increased regulatory oversight.
Outlook
For the period between December 2024 and February 2025, a small net percentage of respondents expect overall credit terms to tighten further across all counterparty types, with non-price terms likely to tighten more significantly than price terms. A net 9% of respondents anticipate tighter non-price terms for banks and dealers, while a net 8% foresee stricter terms for non-financial corporations and sovereigns. These expectations underline the continuation of market adjustments in response to evolving liquidity conditions and regulatory frameworks.
<p>©Markets Media Europe 2024</p>
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