1. Discount Window Access

1.1 Authority for Advances
Discount Window loans are made under the authority of sections 10(b), 13 and 13(a) of the Federal Reserve Act, as well as the provisions governing advances from the Discount Window found in the Federal Reserve's Regulation A, Extensions of Credit by Federal Reserve Banks. Discount Window loans must be secured with collateral that is acceptable to the Reserve Bank.

1.2 Specific Requirements – Appendices of Operating Circular No. 10
Specific requirements for borrowing from Reserve Banks are outlined in the Federal Reserve's Operating Circular No. 10. This circular serves as the lending and security agreement between a Reserve Bank and a borrowing institution. It includes the terms and conditions for obtaining advances, applying repayments and pledging collateral. Blank copies, samples, and instructions for the documents contained in Operating Circular No. 10 can be found on this website

1.3 Lending Documents – Letter of Agreement and Borrowing Resolution
In order to be eligible to borrow and prior to pledging collateral, an institution must submit properly completed and executed borrowing documents to its Reserve Bank. The two principal borrowing documents are the Letter of Agreement (within Appendix 3 of Operating Circular No. 10), which evidences an institution's acceptance of the terms and conditions of Operating Circular No. 10, and the Authorizing Resolutions for Borrowers (within Appendix 3 of Operating Circular No. 10), which evidences an institution's authorization to borrow from and pledge assets to a Reserve Bank.


1.4 Certificate
An institution may be required to submit a Certificate (within Appendix 3 to Operating Circular No. 10 for domestic institutions; within Appendix 4 for foreign banking organizations), which will provide the Federal Reserve Bank all of the information needed to make an effective UCC-1 financing statement filing against the Borrower. An institution should contact its Reserve Bank to determine if it must complete the Certificate.

1.5 List of Individuals Authorized to Borrow and Pledge Assets
Reserve Banks may require an institution to submit a list of individuals, including their titles, who are authorized to borrow and pledge/withdraw collateral as specified in the institution's Authorizing Resolutions for Borrowers.

1.6 Sample Documents
An institution must use the specific wording and format contained in the samples to complete the borrowing documents. Once these documents are submitted to and accepted by the Reserve Bank, an institution may pledge collateral, as described in the following sections of this guide.

1.7 Proceeds and Repayment of Loans
An institution must designate an account to receive credits and debits arising from loan and payment transactions by establishing a Master Accout or designating a correspondent.

1.7.1 Establishing a Master Account
An institution may establish a Master account at its Reserve Bank by executing a Master Account Agreement [see Appendices to Operating Circular 1: Account Relationships ]. This document evidences a financial institution's acceptance of the terms and conditions of Operating Circular 1. Credits and debits arising from loan and payment transactions are generally posted to an institution's master account. Interest and principal payments from securities pledged as collateral will also generally be posted to an institution's master account, as well as entries for wire transfer transactions, check clearing entries, transactions for respondents that clear through the master account, etc.

1.7.2 Using a Correspondent's Account to Process Loans and Payments
An institution that chooses not to maintain a Master account at a Reserve Bank may designate a correspondent through which loan/payment transactions can be processed. In most instances, both the institution and its correspondent need to execute a Letter of Agreement to Correspondent Credit and Payment Agreement to establish this relationship (Exhibit 1 to Appendix 5 of Operating Circular No. 10).

2. Collateral Qualifications

2.1 General Collateral Requirements
Reserve Banks require collateral to secure all obligations owed by financial institutions under Operating Circular No. 10 All collateral pledged to a Reserve Bank must be free of any conflicting claims, liens, security interests or restrictions upon transfer or pledge to the Reserve Bank.

2.2 Obtaining a Security Interest - Filing a UCC-1 Financing Statement
When instruments, accounts, chattel paper or intangibles are pledged to secure Discount Window obligations, a Financing Statement (UCC-1) is filed with the appropriate authorities to perfect the Reserve Bank's interest in the collateral. Reserve Banks conduct lien searches to ensure that no other creditors have filed a UCC-1 covering the same collateral.

2.3 Unacceptable Types of Assets
In determining whether collateral is acceptable for the Discount Window, the Reserve Bank will consider assets that meet regulatory standards for sound asset quality and other associated risks. It will not accept assets that: (1) are subject to adverse regulatory classification; (2) are 30 days or more past due (60 days for mortgage notes and other consumer debt, including student loans); (3) are illegal investments for the pledging institution; or that (4) exhibit collateral and credit documentation deficiencies.

2.3.1 Assets Subject to Restrictions on Assignment
Some assets offered as collateral may be subject to restrictions on assignment. Such assets should be discussed with the Reserve Bank before being pledged.

3. Acceptable Collateral Types

3.1 U.S. Government and Agency Securities
U.S. Government and Agency Securities are recorded in the Federal Reserve's National Book-Entry System (NBES). They are not issued in certificated form. Acceptable categories of NBES-eligible securities include:

3.1.1 U.S. Treasury Obligations
U.S. Treasury Obligations are direct obligations of the U.S. government.

3.1.2 U.S. Government/Agency Obligations: Full Faith and Credit
Full Faith and Credit U.S. Government/Agency Obligations are obligations that are backed by the full faith and credit of the U.S. government.

3.1.3 U.S. Government Sponsored Enterprise Obligations
Government Sponsored Enterprise (GSE) Obligations are debt instruments issued by GSEs such as the Federal National Mortgage Association, Federal Farm Credit Bank, etc.

3.2 Foreign Sovereign Debt Obligations
Foreign Sovereign Debt Obligations are obligations of foreign governments, including development banks. Only certain foreign debt obligations and currencies are acceptable, and pledging such securities may also involve unique perfection issues. Therefore, an institution should contact its Reserve Bank for more specific information.

3.3 Municipal or Corporate Obligations
Municipal or Corporate Obligations are acceptable as collateral if they are of investment quality. These obligations are generally recorded on the books of the Depository Trust Company and include the following:

3.3.1 State and Local Government Obligations
State and Local Government Obligations are debt instruments that represent general debt or special project debt of state- or local-government entities.

3.3.2 Corporate Market Instruments
Corporate Market Instruments are debt instruments issued by corporate entities that may be publicly traded (e.g., asset-backed securities, corporate bonds and mortgage-backed instruments).

3.4 Commercial Paper
Commercial Paper is acceptable as collateral if it is of investment quality. These obligations are generally recorded on the books of the Depository Trust Company.

3.5 Bank Issued Assets
Bank issued assets include certificates of deposit, bank notes, and deposit notes.  They are acceptable as collateral if they are issued by an institution in sound financial condition.  The assets can not be issued by the pledging institution or its affiliate.  These obligations may be recorded on the books of the Depository Trust Company.

3.6 Customer Obligations
Customer Obligations may be accepted as collateral if they meet the credit-quality standards set by an institution's local Reserve Bank. These obligations may include assets such as commercial loans, consumer loans and one-to-four-family mortgage loans.



4. Collateral Pledging and Custody


4.1 National Book-Entry System (NBES)
NBES is the Fedwire® book-entry securities system, which consists of safekeeping, transfer and settlement functions maintained on the books of Reserve Banks. U.S. Treasury-issued securities and certain U.S. government agency-issued securities pledged in electronic (book-entry) form in NBES may be held by an institution in various securities accounts.

4.1.1 Requirements under Operating Circular No. 7
Book-entry securities pledged to secure Discount Window obligations are held in an institution's Loans and Discount (U102) restricted securities account. Operating Circular No. 7, Book-Entry Account Maintenance and Transfer Services contains specific information regarding book-entry accounts. Additional information may be found at www.frbservices.org.

4.1.2 Establishing an Account Relationship
If an institution has an account relationship established in NBES, it should contact the appropriate Wholesale Operations site to verify that the Loans and Discount (U102) restricted securities account has been activated as part of its account relationship. If the U102 account is not activated, the institution should instruct the appropriate Wholesale Operations site to establish a U102 account.

If an institution does not have an NBES relationship, it should contact the appropriate Wholesale Operations site to obtain the authorization forms necessary to establish an NBES account.

4.1.3 Online Transferring Procedures
If an institution has online access to NBES, it may transfer securities in or out of its Loans and Discount restricted securities account through the FedLine® network (subject to normal FedLine security procedures).

4.1.4 Off-line Procedures
If an institution has off-line access to NBES, it may transfer securities in or out of its Loans and Discount (U102) restricted securities account by telephone or by sending facsimile or written instruction to the appropriate Wholesale Operations site.

4.1.5 Wholesale Operations Sites
The Federal Reserve Bank of Boston's Wholesale Operations site (800-327-0147) serves financial institutions located in the following Federal Reserve Districts:

• Boston
• Cleveland
• Dallas
• New York
• Philadelphia
• St. Louis

The Federal Reserve Bank of Kansas City's Fedwire Operations site serves financial institutions located in the remaining Federal Reserve Districts:

• Atlanta
• Chicago
• Kansas City
• Minneapolis
• Richmond
• San Francisco

4.1.6 Off-line Required Information
Transfer instructions must include an institution's ABA number, the account in which the securities are held and the account into which the securities should be transferred to U102. Appendix B to Operating Circular 7 lists the operating hours to complete online or off-line transfers.

4.1.7 Securities Held in Correspondent Accounts
If a correspondent is the custodian of an institution's securities, the institution should also contact the correspondent and instruct it to transfer the securities to the institution's U102 restricted securities account. The institution must specify its ABA number to the Reserve Bank or correspondent. Appendix B to Operating Circular 7 lists the operating hours in which securities can be transferred (free) from a correspondent.

4.2 DTC Pledge Requirements
The Depository Trust Co. (DTC) is a limited-purpose trust company organized under New York law that acts as the central securities depository for most publicly traded equity securities and many fixed-income securities in the U.S. market. Each Reserve Bank has established a pledge account with DTC through which securities may be pledged to secure Discount Window obligations.

4.2.1 DTC Arrangement Options
DTC arrangements are used to pledge eligible securities (e.g., municipal or corporate debt securities with acceptable credit ratings) that institutions hold through DTC. An institution may directly pledge such securities (if it is a DTC participant), or it may pledge DTC-held securities through a correspondent that is a DTC participant. An institution should contact its Reserve Bank to determine if a separate legal agreement is required to pledge securities held at DTC.

4.2.2 Approval of Securities to be Pledged
Securities will be reviewed to ensure that they comply with the Reserve Bank's acceptability standards. This review and acceptance process is completed automatically by the Federal Reserve's Collateral Management System. If a security is determined to be unacceptable, it will be rejected. The Reserve Bank will notify the pledging institution of the rejection by phone in most cases.

4.2.3 Instructions for DTC Participants
Institutions that are DTC participants may initiate the transfer of securities in DTC's system to their Reserve Bank's Discount Window collateral account at DTC.

4.2.4 Institutions Pledging Securities through a DTC Participant
Institutions holding securities through correspondents that are DTC participants must direct their correspondent to initiate the transfer of securities to their Reserve Bank's Discount Window collateral account at DTC. An institution should include its ABA number in the instructions.

4.2.5 Acknowledgement of Deposit
The institution will receive an acknowledgement of deposit from its Reserve Bank once a transfer has been completed on the books of DTC and the Reserve Bank.

4.3 Third Party Custody Pledging Arrangements
An institution may designate a third party custodian to provide collateral custody services in connection with the Discount Window. Third party custody arrangements involve an institution (borrower), another institution that holds the assets to be pledged (custodian) and the Reserve Bank (lender). A third party custodian must not be affiliated with a pledging institution and must be approved by the Reserve Bank prior to any pledge of collateral. Custodians that are affiliated with the pledging institution will be considered under the Borrower-in-Custody pledging arrangement. In some cases, an acceptable custodian may be an entity other than a financial institution. In all cases, however, the custodian must be in sound financial condition and have acceptable custody controls for the assets in its possession.

4.3.1 Agreement of the Third Party Custodian
An institution should contact its Reserve Bank to obtain approval of its proposed custodian. The institution must agree to the provisions of the Agreement for Third Party Custodian to Hold Collateral (within Appendix 5 of Operating Circular 10), prior to pledging collateral under a third party custody program.

4.3.2 Execution by Pledgor of the Letter of Agreement
An institution and its designated custodian must execute the Letter of Agreement for Designating a Third Party Custodian (within Appendix 5 of Operating Circular 10) to confirm acceptance of the terms and conditions of the Agreement for Third Party Custodian to Hold Collateral and to identify the custodian.

4.3.3 Identification of Assets and Advice Issuance
After the custodian is approved, the institution will send a list of assets to its Reserve Bank for approval. Once the assets are reviewed and approved, the custodian will identify the assets as pledged by issuing advices to the Reserve Bank. The advice confirms that the custodian holds the assets as collateral for the Reserve Bank. The Reserve Bank will then send the institution an acknowledgment of deposit confirming that the assets have been accepted as collateral.

4.4 Borrower-in-Custody of Collateral (BIC) Program
BIC arrangements may be used when an institution prefers to maintain physical control of its customer loans. These arrangements are often established when an institution is pledging a high volume of assets (e.g., consumer and/or commercial loans). Under this arrangement, institutions may retain custody of collateral while pledging it to a Reserve Bank. BIC collateral must be marked as being pledged to the Reserve Bank.

4.4.1 Qualifying for a BIC Arrangement
Institutions may qualify for a BIC arrangement at the discretion of the Reserve Bank. Generally, institutions must be in sound financial condition, maintain appropriate document-storage facilities and have an acceptable automated record/reporting system. This record/reporting system must be capable of identifying the assets subject to the Reserve Bank's security interest.

4.4.2 Examples of Eligible Assets under a BIC Arrangement
Examples of the types of assets eligible to be pledged under a BIC arrangement are:

• One- to four-family mortgage loans
  
• Auto loans
  
• Commercial loans
  
• Commercial real estate loans
  
• Consumer installment loans
  
• Home equity loans, or
  
• Student loans

4.4.3 Making a Pledge Arrangement
An institution must contact its Reserve Bank to request this pledging arrangement.

4.4.4 Completing the Certification
An institution must complete a Borrower-In-Custody of Collateral Certification that describes the institution's internal custody procedures, as well as its asset-evaluation and collateral-reporting processes.

4.4.5 Written Explanation of the Internal Rating System
An institution must provide a written explanation of the institution's internal loan-rating system to indicate how it assesses and rates the credit quality of its customers. (This requirement does not apply to consumer or residential mortgage loans.)

4.4.6 Review by Reserve Bank Staff Members
An institution must allow Reserve Bank personnel to visit the institution and perform a review of the pledged collateral. (The Reserve Bank will set up this appointment.) Thereafter, periodic, on-site inspections may be conducted.

4.4.7 Periodic Collateral Schedule
An institution must submit a periodic collateral schedule (in electronic or hard-copy form) that identifies assets held under the BIC arrangement. An institution should contact its Reserve Bank to learn what specific information to include on the collateral schedule and how frequently the schedule should be submitted. If an institution fails to file an updated collateral schedule by a specified time of the month, it will be notified that an update has not been received and advised that the BIC collateral will be assigned a zero value after a specified grace period. Some types of BIC collateral may be subject to more- or less-frequent updates.

4.4.7.1 Automated Loan Deposit
An institution may choose to submit its periodic collateral schedule electronically in accordance with a specified format.  In most cases, loans submitted in this specified format will receive a higher value than loans submitted in other formats.  An institution that wishes to submit electronic listings by email should complete the Electronic Pledge Authorization Letter. Electronic listings sent by email should be accompanied by a Cover Letter.

4.4.8 Acknowledgement of Deposit
After the Reserve Bank reviews and approves the proposed BIC collateral, it will send an acknowledgment of deposit confirming that the BIC assets have been accepted as collateral.

4.5 Reserve Bank Custody
Reserve Bank custody of collateral is available for custody of tangible assets, such as promissory notes evidencing commercial/consumer loans. Prior to pledging customer obligations, an institution should contact its Reserve Bank to discuss the pledge process. The Reserve Bank will request financial information and other details about the institution's customers in order to evaluate the credit quality of the obligations.

4.5.1 Review and Acknowledgement of Deposit
Such assets may be deposited with a Reserve Bank along with a Deposit Application that specifies that the assets are being pledged as collateral for Discount Window obligations. Once these physical assets have been reviewed and approved, the Reserve Bank will send an acknowledgment of deposit confirming that the assets have been accepted as collateral.

4.5.2 Acceptable Documents
Customer obligations will only be acceptable if evidenced by an original document signed by the customer. This document may take the form of a promissory note and/or credit agreement that states the specific terms of the lending arrangement.

4.5.3 Form for Liquidation of Assets
Customer obligations physically delivered to a Reserve Bank must be in a form such that the assets may be liquidated without further action by the institution (endorsement of pledged notes or power of attorney may be required). An institution should contact its Reserve Bank for additional information regarding this requirement.

5. Collateral Valuation and Acceptance Criteria

5.1 Credit Quality
The Reserve Bank assigns a risk rating to the customer loans pledged by institutions as collateral. Upon financial review, a "minimal risk" or "normal risk" designation is assigned to the pledged loans. In some cases, loans receiving a "minimal risk" rating will receive a higher collateral value than those that are assigned a "normal risk" rating.

5.2 Calculating Collateral Value Using Margins
To calculate the collateral (lendable) value, a margin is applied to either the market price of the securities (or the outstanding principal amount of assets that do not receive market values). Market prices are used as the basis for collateral valuation whenever active and reliable markets exist. Market prices are obtained from one or more vendors and are updated at least weekly, or more frequently if market conditions warrant. If the Reserve Bank is unable to obtain a market price for pledged assets (e.g., customer loans) from its vendor(s), a standard calculation is used to establish a margin. A margin is based on an assessment of various characteristics of the specific collateral, including credit quality, interest rate, maturity, liquidity and the current interest rate environment. The Federal Reserve's Discount and PSR Margins are periodically reassessed to ensure that the margins reflect market conditions.

5.2.1 U.S. Government and Agency Obligations
U.S. government and agency obligations are generally considered to be of acceptable credit quality. Some agency obligations, however, may be reviewed for credit quality.

5.2.2 Municipal and Corporate Issues
Municipal and corporate securities and debt instruments that are publicly traded must either have an investment-grade rating, as assigned by a recognized rating service (e.g., Moody's or Standard and Poor's), or be of equivalent financial quality to be accepted as collateral. For Moody's, the assigned rating must be Baa3 or higher; for Standard & Poor's, the rating must be BBB- or higher. Generally, debtors or debt instruments assigned investment-grade ratings are regarded as having "adequate to strong" capacity to repay principal and interest on the obligation(s).

5.2.3 Customer Obligations
Customer obligations may, under some circumstances, be pledged without submitting the supporting financial statements for each customer whose obligation is being pledged. If an institution's primary regulator has determined that its internal risk-rating system accurately reflects the credit quality of its loan portfolio, then the institution may qualify for its Reserve Bank's Qualified Loan Review (QLR) Program. This program does not apply to consumer or residential mortgage loans.

5.2.4 Qualified Loan Review (QLR)
The QLR program relies upon the integrity of an institution's rating system and internal credit-evaluation procedures to confirm the credit quality of loans pledged to secure Discount Window obligations. Reserve Bank staff members complete a review of the institution's internal rating system, loan-documentation practices and written definitions of the assigned ratings before accepting an institution into the QLR program.

6. Withdrawing or Substituting/Updating Collateral

6.1 Online Withdrawals of Securities Pledged through NBES
Online withdrawals of securities pledged through NBES may be initiated via FedLine®. Requests to withdraw NBES-held collateral are subject to Reserve Bank approval. Withdrawal entries will be effected upon confirmation that the securities subject to the withdrawal request are not required to secure the institution's obligations to the Reserve Bank.

6.2 Off-line Withdrawals of Securities Pledged through NBES
Off-line withdrawals of securities pledged through NBES may be initiated by contacting the appropriate Wholesale Operations site and requesting the release of book-entry securities from an institution's U102 restricted securities account. An institution must specify the issue, CUSIP number and principal amount of any security it seeks to withdraw as collateral. Withdrawal requests are subject to Reserve Bank approval and will be effected upon confirmation that the securities subject to the withdrawal request are not required to secure the institution's obligations to the Reserve Bank.

6.3 Withdrawals via DTC
Institutions that are not DTC participants may initiate withdrawals of securities pledged through DTC by contacting their correspondent bank. Insitutions that are DTC participants may initiate withdrawal requests directly with DTC. Withdrawal Requests are subject to Reserve Bank approval and will be effected upon confirmation that the securities subject to the withdrawal request are not required to secure the institution's obligations to the Reserve Bank.

6.4 Withdrawals of Collateral Held by a Third Party Custodian or Pledged Under the BIC Program
Institutions initiate withdrawals of collateral held by third party custodians or under a BIC program by submitting a written withdrawal request, signed by an authorized official, to the Reserve Bank. This request should contain a detailed description of the collateral subject to the withdrawal request. In the case of collateral held by a third party custodian, the institution must also provide its custodian with instructions for the withdrawal and direct it to wait for Reserve Bank approval prior to processing the withdrawal request.

6.5 Withdrawals of Assets from Reserve Bank Custody
To arrange for the withdrawal of collateral in the physical custody of a Reserve Bank, an institution must send a letter, signed by an authorized official, requesting the withdrawal. The letter must specifically identify the collateral (including receipt numbers and current outstanding dollar values) and provide shipping instructions. Once the Reserve Bank confirms that such assets are not required to secure the institution's obligations to the Reserve Bank, the assets will be returned pusuant to the shipping instructions.





7. Collateral Account and Transaction Documentation

7.1 U.S. Government and Agency Securities in NBES
All transactions and holdings of pledged collateral are documented by advices and statements issued by Reserve Banks. For U.S. Government and Agency securities deposited in NBES, the Reserve Bank issues advices that confirm all deposits, withdrawals, maturity redemptions and interest payments.

7.1.1 NBES Monthly Account List
NBES produces a monthly Securities Account List statement of holdings for securities pledged to a Reserve Bank and held in an institution's Loans and Discount (U102) restricted securities account.

7.1.2 NBES Access through FedLine
Institutions may also obtain transaction and/or pledge status information through FedLine.

7.2 Collateral Management System (CMS)
The Federal Reserve's Collateral Management System (CMS) records collateral held outside of the NBES system. It documents deposits of collateral held in Reserve Bank vaults or by third party custodians (including DTC), as well as BIC collateral pledges.

7.2.1 CMS Transaction Advices
An acknowledgement of deposit is sent to institutions to confirm deposits of assets into collateral accounts. Withdrawals are documented by an acknowledgment of withdrawal form.

7.2.2 CMS Statement of Collateral Holdings
Monthly statements of holdings are sent to institutions to confirm holdings in collateral accounts as of the statement issue date.

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Federal Reserve District	Toll-Free Number
1-Boston	800-716-3773
2-New York	866-226-5619
3-Philadelphia	800-372-2011
4-Cleveland	888-719-4636
5-Richmond	800-526-2036
6-Atlanta	888-500-7390
7-Chicago	800-380-3762
8-St. Louis	866-666-8316
9-Minneapolis	877-837-8815
10-Kansas City	800-333-2987
11-Dallas	877-682-3256
12-San Francisco	866-974-7475

Table 3--Wholesale Operations Sites

Federal Reserve Bank of Boston
800-327-0147

Federal Reserve Bank of Kansas City
800-333-2448