Frequently Asked Questions

The New Discount Window & Payment System Risk Collateral Margins Table, Effective October 19, 2009

1. Why is the Federal Reserve introducing a new discount window and payment system risk collateral margins table?



2. What is the difference between the collateral margins table changes announced on March 30, 2009 and the changes introduced August 19, 2009?



3. Is the Federal Reserve’s new collateral margins table a response to the financial crisis or a signal that the markets are getting better or worse?



4. Will the changes negatively impact depository institutions’ ability to utilize the discount window and Term Auction Facility?



5. Do the changes to the collateral categories listed within the collateral margins table reflect a change in collateral eligibility?



6. Why is the column titled “Lendable Value for Securities or Instruments if Market Price Not Available” being eliminated from the current collateral margins table?



7. What are “minimal risk rated” and “normal risk rated” loans?



8. What are “individually deposited” and “group deposited” loans?



9. Why are individually deposited loan margins presented as ranges rather than discrete values?



10. How has the presentation of group deposited loans changed from the current collateral margins table?



11. How often will the estimated fair market values of loan pledges be updated?



12. What new or additional information is available with the introduction of the new collateral margins table?



13. How can a depository institution estimate what its collateral value will be upon implementation of the new collateral margins table?



14. How can a depository institution monitor its collateral value on an ongoing basis?



15. How will a depository institution know whether it will need to pledge additional collateral due to the implementation of the new collateral margins margin table effective October 19, 2009?



16. Where is there further information about discount window and payment system risk collateral?




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1. Why is the Federal Reserve introducing a new discount window and payment system risk collateral margins table?

The Federal Reserve periodically reviews its collateral margins table and models. The changes reflect analytical improvements in the methodology and the use of better and more granular data. Note that the new collateral margins table will be effective on October 19, 2009.

2. What is the difference between the collateral margins table changes announced on March 30, 2009 and the changes introduced August 19, 2009?

The changes introduced on August 19, 2009 reflect both improvements to discount window and payment system risk collateral valuation models and the analysis of more recent time series data. In contrast, changes to the lendable values for group deposited loan announced on March 30, 2009 were made to reflect recent trends in values of certain types of loans under the existing models.

3. Is the Federal Reserve’s new collateral margins table a response to the financial crisis or a signal that the markets are getting better or worse?

The changes to the collateral margins table are the result of a multi-year review of valuation by Federal Reserve credit risk management staff. The Federal Reserve continually conducts reviews and adjusts collateral valuation and margin practices. The new collateral margins table announced August 19, 2009 incorporates improved methodology and data analysis and should not be viewed as a response to the financial crisis.

4. Will the changes negatively impact depository institutions’ ability to utilize the discount window and Term Auction Facility?

Based on a recent impact analysis, less than 6% of depository institutions with outstanding discount window loans would be required to increase their collateral pledge or pay down existing borrowings if the new collateral margins were implemented as of the date of the analysis. The impact on individual depository institutions will vary depending upon the composition of collateral pledged. The lag between the announcement and implementation of the new collateral margins will provide depository institutions time to pledge additional collateral if needed or desired.

5. Do the changes to the collateral categories listed within the collateral margins table reflect a change in collateral eligibility?

The changes to the collateral margins table reflect a more granular list of collateral categories, not a change in collateral eligibility. For example, separate collateral margins are being introduced for AAA-rated corporate, foreign government, foreign government guaranteed, and Brady bonds. U.S. issued covered bonds are being added as a separate collateral category. Other collateral category changes reflect reorganization and renaming. In addition, certain loan types are listed separately, and the minimal/normal risk distinction is made for additional loan types.

6. Why is the column titled “Lendable Value for Securities or Instruments if Market Price Not Available” being eliminated from the current collateral margins table?

Upon implementation of the new collateral margins table, eligible securities for which a vendor price cannot readily be obtained will be assigned an internally modeled price on a daily basis. The margin for the >10 duration bucket will be applied to such securities.

7. What are “minimal risk rated” and “normal risk rated” loans?

“Minimal risk rated” loans have credit risk levels that are similar to investment grade debt. “Normal risk rated” loans are considered to have credit risk levels that are similar to below investment grade debt while remaining “pass” credits from a regulatory standpoint. Under the new collateral margins table, commercial real estate, construction, and raw land loans will be added as asset types for which the minimal/normal risk distinction can be made. The minimal/normal risk distinction is currently available for agricultural and commercial loans. Depository institutions can contact their Federal Reserve Bank to ensure they receive maximum collateral value for loan types for which the minimal/normal risk distinction can be made.

8. What are “individually deposited” and “group deposited” loans?

These terms refer to the way the Federal Reserve Banks maintain information about pledged loans in their Collateral Management System (CMS). Loans that are recorded individually into CMS are considered “individually deposited.” Loans are individually deposited if they are pledged through the Automated Loan Deposit process. Certain loans held in the custody of a Federal Reserve Bank are also entered into CMS individually. All other loan pledges are recorded into CMS as groups and are thus considered “group deposited.”

The collateral value of individually deposited loans will always be greater than or equal to that of comparable group deposited loans. The Federal Reserve is modifying the Automated Loan Deposit process to facilitate wider adoption; further information about these changes will be announced at a later date.

9. Why are individually deposited loan margins presented as ranges rather than discrete values?

Under the current collateral margins table, a uniform margin is applied to the estimated fair market value of all individually deposited loans. Under the new collateral margins table, the margin applied to an individually deposited loan’s estimated fair market value will depend upon the type, coupon, and time to maturity of the loan. The margins for particular coupon-maturity combinations can be viewed by clicking on the margin range in the new collateral margins table.

10. How has the presentation of group deposited loans changed from the current collateral margins table?

The current collateral margins table presents a “lendable value” figure, which is a combination of margin and estimated fair market value, which can be multiplied by the outstanding balance of a loan pool to determine its collateral value. The new collateral margins table, effective October 19, 2009, presents a margin that will be applied to the Federal Reserve’s fair market value estimate of a typical loan pool for each loan type. This change provides greater consistency with the presentation of margins for other asset types in the collateral margins table.

11. How often will the estimated fair market values of loan pledges be updated?

Estimated fair market values will be updated monthly, effective the first business day of each month.

12. What new or additional information is available with the introduction of the new collateral margins table?

The new collateral margins table incorporates an explicit listing of the foreign currencies in which eligible securities may be denominated.

13. How can a depository institution estimate what its collateral value will be upon implementation of the new collateral margins table?

Discount window staff at each depository institution’s Federal Reserve Bank will be able to provide this information upon request.

14. How can a depository institution monitor its collateral value on an ongoing basis?

An institution can review its Statement of Collateral Holdings to determine the total value of its collateral as well as the collateral value for individual assets. An institution should contact its Federal Reserve Bank to sign up for electronic delivery of its Statement of Collateral Holdings. Note that prior to October 19, 2009, these Statements will reflect values calculated under the current collateral margins table.

As part of the initiative to implement changes to the Payment System Risk policy in late 2010 or early 2011, the Federal Reserve is also developing enhancements [PDF; 60K] to provide institutions with additional information on collateral pledged to their Federal Reserve Bank.

15. How will a depository institution know whether it will need to pledge additional collateral due to the implementation of the new collateral margins table, effective October 19, 2009?

The Federal Reserve has already begun analyzing all depository institutions’ current discount window borrowings and PSR collateral requirements relative to their collateral values under the new collateral margins table. The Federal Reserve Banks will notify depository institutions whose pledged collateral will not be sufficient in advance of the implementation date.

16. Where is there further information about discount window and payment system risk collateral?

Additional information is available in the collateral section of www.frbdiscountwindow.org. Information is also available from discount window staff at the Federal Reserve Banks.