Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Lending to Primary Dealers

Recent Developments

• Borrowing at the Primary Dealer Credit Facility (PDCF) and Term Securities Lending Facility (TSLF) has declined substantially over recent weeks as conditions in money markets reportedly have improved.

Background

On March 16, 2008, the Federal Reserve announced the creation of the PDCF, which is an overnight loan facility that provides funding to primary dealers and helps foster improved conditions in financial markets more generally.

PDCF credit is fully secured by collateral with appropriate haircuts--that is, the value of the collateral exceeds the value of the loan extended. Initially, eligible collateral was restricted to investment-grade securities. On September 14, 2008, the eligible set of collateral was broadened to closely match the types of instruments that can be pledged in the tri-party repurchase agreement systems of the two major clearing banks. On September 21, 2008, the Federal Reserve Board authorized the extension of credit to a set of other securities dealers on terms very similar to those for the PDCF. Credit extended under either program is reported in table 1 of the H.4.1 statistical release as "Primary dealer and other broker-dealer credit," and is included in "Other loans" in tables 9 and 10 of the H.4.1 release.

Table 9. Credit Outstanding to Primary Dealers
As of May 27, 2009

Table 10. Concentration of Borrowing at the PDCF and TSLF
As of May 27, 2009

On March 11, 2008, the Federal Reserve announced the creation of the TSLF. Under the TSLF, the FRBNY lends Treasury securities to primary dealers for 28 days against eligible collateral in two types of auctions. For so-called "Schedule 1" auctions, the eligible collateral consists of Treasury securities, agency securities, and agency mortgage-backed securities. For "Schedule 2" auctions, the eligible collateral includes Schedule 1 collateral plus highly rated private securities. In mid-2008, the Federal Reserve introduced the Term Securities Lending Facility Options Program (TOP), which offers options to the primary dealers to draw upon short-term, fixed-rate TSLF loans from the SOMA portfolio, in exchange for program-eligible collateral. The TOP program is intended to enhance the effectiveness of the TSLF by offering added liquidity during periods of heightened collateral market pressures, such as quarter-end dates.

The TSLF and TOP programs support the liquidity of primary dealers and foster improved conditions in financial markets more generally. Securities lent through these programs are reported in table 1A of the H.4.1 statistical release.

Table 11. PDCF Collateral
As of May 27, 2009

Table 12. PDCF Collateral by Rating
As of May 27, 2009

In addition to the TSLF and TOP, the Federal Reserve has long operated an overnight securities lending facility as a vehicle to address market pressures for specific Treasury securities that are particularly sought after. Amounts outstanding under that program are, generally, fairly modest, and these are also reported in table 1A of the H.4.1 statistical release.

Collateral

Eligible collateral for loans extended through the PDCF includes all assets eligible for tri-party repurchase agreement arrangements through the major clearing banks as of September 12, 2008. The amount of PDCF credit extended to any dealer may not exceed the lendable value of eligible collateral that the dealer has provided to FRBNY. The collateral is valued by the clearing banks; values are based on prices reported by a number of private-sector pricing services that are widely used by market participants. Loans made under the PDCF are made with recourse beyond the collateral provided by the primary dealer entity itself.

Table 13. TSLF Collateral
As of May 27, 2009

Transactions under the TSLF involve lending securities rather than cash; a dealer borrows Treasury securities from the Federal Reserve and provides another security as collateral. Eligible collateral is determined by the Federal Reserve. Currently, two schedules of collateral are accepted. Schedule 1 collateral is Treasury, agency, and agency-guaranteed mortgage-backed securities. Schedule 2 collateral is investment-grade corporate, municipal, mortgage-backed, and asset-backed securities, as well as Schedule 1 collateral. Haircuts on posted collateral are determined by FRBNY using methods consistent with current market practices.

Table 14. TSLF Collateral by Rating
As of May 27, 2009

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