Summary of the Federal Reserve’s Approach to Valuing and Margining Collateral Pledged for Discount Window and Payment System Risk Purposes1
In general, the Federal Reserve seeks to value all pledged collateral at fair market value. Margins are applied to fair market value estimates and are based on risk characteristics of the pledged asset as well as the anticipated volatility of the fair market value of the pledged asset over an estimated liquidation time frame.
Securities are typically valued using prices supplied by external vendors. Securities for which a vendor price cannot readily be obtained will be assigned an internally modeled price when the Federal Reserve can reasonably estimate a value from market information using internal valuation models. Loans are valued using internal models. To assign the internal fair market value estimate of a loan, the cash flow characteristics of the loan are modeled and the internal fair market value estimate is calculated as the net present value of these cash flows. For group deposited loans, where less cash flow information is provided by pledging institutions, more conservative cash flow assumptions are used to calculate the internal fair market value estimate of a loan pool.
Margins for securities and loans pledged as collateral are estimated using Value-At-Risk analysis, which develops margins from historical price volatility of assets within each collateral category. Securities margins are assigned based on asset type and duration. Any security not assigned a price by an external vendor receives the lowest margin for that asset type. For individually deposited loans, margins are assigned based on the type, coupon, and maturity of the loan. For group deposited loans, a single margin is assigned based on conservative assumptions about the characteristics of pledged loan pools. The margin for group deposited loans is equal to or below the lowest margin applied to comparable loans pledged via individual deposit.
Footnotes:
1. Including Term Auction Facility
