Fed allows additional securities to be pledged as collateral for liquidity facilities

By Angela McDaniels

Tacoma, Wash., Sept. 15 - The Federal Reserve Board has broadened the collateral eligible to be pledged at the Primary Dealer Credit Facility and Term Securities Lending Facility, according to a statement released on Sunday.

For the Primary Dealer Credit Facility, the eligible collateral was broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, collateral had been limited to investment-grade debt securities.

For the Term Securities Lending Facility, eligible collateral for Schedule 2 auctions was expanded to include all investment-grade debt securities. The Fed noted that previously, only Treasury securities, agency securities and AAA-rated mortgage-backed and asset-backed securities could be pledged.

The aim of the changes is to enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally, the Fed said in the release.

"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," chairman Ben Bernanke said in the release. "The steps we are announcing today [Sunday], along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets.

"We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world."

More, bigger auctinos

In addition to the collateral changes, Schedule 2 Term Securities Lending Facility auctions will be conducted each week instead of every two weeks, and the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion from a total of $125 billion.

Amounts offered in Schedule 1 auctions will remain at a total of $50 billion.

The Fed said it also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception will expire on Jan. 30.

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