WSJ – In another sign of market participants exercising caution amid fragile market conditions, a number of hedge funds late last month tried to reduce their exposure to European banks with Credit Suisse Group using derivatives, but the Swiss dealer declined to take some of their trades, according to a person familiar with the matter.
Market making in derivatives and other financial instruments is one of a dealer bank’s primary functions. But in volatile markets, dealers’ risk-management controls may make them reluctant to assume too much exposure on one side of a trade. That is especially so if several customers are attempting to position themselves in the same direction and there is a risk of the dealer not being able to hedge itself with another dealer in a cost-effective manner.
