Reuters Italia – Fierce competition to attract European hedge fund fixed income securities business has led to looser credit quality controls by banks, a survey by U.S-based consulting firm GreenwichAssociates showed.
Investment bank prime brokerage divisions offer hedge funds settlement, custody and securities lending services and earn their money by charging a premium over money market lending rates for loans.
Specifically on the fixed income side hedge funds raise money in the repo market by selling bonds they hold and at the same time agree to buy them back at fixed prices in the future.
“Dealers are lowering credit quality requirements for collateral on their hedge fund repo business,” Greenwich said in a research note on Tuesday.
More than 45 percent of dealers in 2004 insisted on high quality collateral such as government bonds or agency securities, the survey found. But this year nearly 70 percent are accepting collateral of lower quality.
