Large Financial Firm Failure Seen Likely

NEW YORK (Reuters) – Most institutional investors expectanother failure of a major financial services firm in thecoming year and view credit default swaps as a serious threatto market stability, according to a survey by GreenwichAssociates.

Nearly 60 percent of 146 institutions surveyed in NorthAmerica and Europe expect another major financial services firmto collapse in the next six months, and another 15 percentthink it will happen in six to 12 months, according to thesurvey, which was released on Tuesday.

Credit default swaps, which are used to hedge against thedefault of a debt issuer or speculate on its credit quality,are viewed by almost 85 percent of U.S. respondents and morethan 55 percent of European institutions as a serious threat toglobal markets, Greenwich said.

Concerns over the health of credit default swapcounterparties led 62 percent of fixed income investors tolimit their use of the contracts, the survey found.

The U.S. Federal Reserve organized a rescue of Bear Stearnsin March on concerns its failure could have sparked a systemicmeltdown in financial markets, given the size of Bear’s role asa counterparty in the CDS market.

As losses in bad mortgage debt and other securities mount,investors view a similar failure as likely.

"If you are looking for a silver lining in these findings,it seems that most institutions think we are currently in themost dangerous period for global financial services firms,"Greenwich Associates consultant Frank Feenstra said in thereport.

"Perhaps if the markets can make it through the next sixmonths, the level of pessimism may begin to subside," he added.

More than 70 percent of fixed income investors said theymanaged counterparty risks by trading only with the mostfinancially sound banks and broker dealers, and 65 percent saidthey try to limit the concentration of exposure with a singlecounterparty, Greenwich said.

Three-quarters of survey respondents said they believeplans by a group of dealers to create a centralized clearingentity will mitigate CDS counterparty risk, though the majorityof hedge funds said they would prefer a clearing platformoperated by an exchange.

Investors also reported their banks have tightened marginor collateral requirements since the credit crunch began a yearago, though nearly 65 percent of investors said this had nothad a significant impact on their trading activities.

The Greenwich Associates survey included 32 hedge funds and114 banks and investors who only take "long" positions. Seventypercent of respondents are in the United States, with others inCanada and Europe.

(Reporting by Karen Brettell; Editing by Dan Grebler)