JPMorgan on the Federal Reserve Announcement on Sunday Evening

Here is the JPMorgan summation of the meaning of the Fed announcement on Monday evening: In an effort to support financial markets, the Federal Reserve this evening announced several changes to its liquidity facilities and regulatory policies.  Although it would appear as of writing that the Fed has resisted calls to directly support the purchase of any failing financial institutions, tonight’s measures appear aimed at limited the system-wide fall-out from the failure of those same institutions.  In particular, four steps were taken: (1) broadening the collateral accepted at the Primary Dealer Credit Facility (PDCF), (2) broadening the collateral accepted at the Term Securities Lending Facility (TSLF), (3) increasing somewhat the size of the TSLF, and (4) relaxing the rules associated with section 23A of the Federal Reserve Act, which sets limits on transactions between banks and their affiliated broker-dealer arms.

With regard to the first point, it would appear that the main new class of asset now available for pledging at the PDCF would be corporate equities.  Before tonight, the PDCF was fairly broad in the categories of assets it would accept, including investment-grade ABS, MBS, corporate debt and munis.  Tonight’s measures increase that list to include any collateral that can be pledged in the tri-party report market.  The second measure, expanding collateral at the TSLF, opens Schedule 2 auctions to all investment-grade debt securities.  Previously, the TSLF Schedule 2 collateral included Treasuries, agencies, and AAA-rated MBS and ABS.  The third measure increases Schedule 2 TSLF funds available to the market from $125 billion to $150 billion.  In addition, Schedule 2 auctions will now be held weekly instead of every other week.  Finally, the fourth measure relaxes section 23A rules to allow banks to provide funding to their broker-dealer affiliates for any asset typically funded in the tri-party report market.  Section 23A of the Federal Reserve Act places restrictions on the transactions that banks may undertake with their affiliates (such as broker-dealers) by, for example, limiting those transactions to be no more than 10% of the bank’s capital.  Tonight’s actions should considerably increase the amount of transactions allowable between banks and their broker-dealer arms.


Originally published at Across the Curve and reproduced here with the author’s permission.