Margin rules depress derivative contract terms, survey finds
New EU margin requirements are driving less favourable non-price terms and conditions in new or renegotiated over-the-counter (OTC) derivatives master agreements, according to a EU Commission market survey.
Respondents to the commission’s quarterly survey on EU securities financing market liquidity cited the implementation of European Market Infrastructure Regulation (EMIR) margin requirements for non-cleared OTC derivative contracts as the main driver of the less favourable contract terms.
Only few changes were reported regarding credit terms and conditions with respect to non-centrally cleared OTC derivatives.
The commission surveyed a panel of 28 large banks, comprising 14 euro area banks and 14 banks with head offices outside the euro area.
Overall, the survey found that credit terms offered to counterparties in both securities financing and OTC derivatives transactions in the three month prior to September remained basically unchanged.
According to the commission, the relative stability in overall credit terms over the past two reference periods follows the considerable net tightening of credit terms reported throughout the previous two years.
The results mirror those from the previous survey, which also saw minimal changes to overall liquidity.
A small net percentage of respondents reported a decrease in the maximum amount and the maximum maturity of funding for many types of collateral, as well as a decrease in haircuts applied to government bonds and a decrease in financing rates when government and corporate bonds were used as collateral.
In a report on the survey, the commission stated: “On balance, respondents reported that the liquidity and functioning of markets for all types of underlying collateral covered by the survey remained basically unchanged. These results follow the deterioration reported since mid-2015 in liquidity and functioning of markets for many types of euro-denominated collateral.”
The survey is conducted four times a year and covers changes in credit terms and conditions over the three-month reference periods ending in February, May, August and November.
The September 2017 survey collected qualitative information on changes between June and August 2017.