Release Date: August 19, 2009

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

The Federal Reserve is announcing new collateral margins for discount window1 lending and payment system risk purposes, effective October 19, 2009. These changes stem from the most recent review of margins and valuation practices that the Federal Reserve periodically conducts.

Collateral management is a central element of the Federal Reserve’s credit risk management practices.  Accordingly, the Federal Reserve periodically conducts reviews of its margins and valuation practices on a regular basis, making adjustments as needed.  The new collateral margins table announced today continues that practice, and reflects the results of a broad-based review of methodology and data sources, that began before the current financial crisis.

There are no changes to the key principles underlying the Federal Reserve’s collateral management practices, such as: frequent revaluation of assets, use of margins that are derived from historical Value-at-Risk analysis to mitigate Reserve Bank exposure to market and credit risk, use of the best available data, and periodic reassessments of model assumptions.  However, the changes to the collateral margins table reflect analytical improvements in methodology, technical improvements to models, and the use of better, and more granular data in the analyses.

Accompanying this announcement are frequently asked questions. In addition, a high-level summary of the valuing and margining approach for discount window and payment system risk collateral is available in The Federal Reserve System's Collateral Guidelines [PDF; 193K].

The new collateral margins table, effective October 19, 2009, provides greater clarity about the foreign currencies in which eligible assets may be denominated. In addition to changes to collateral margins, the new collateral margins table incorporates the following important changes:  

  • Previously, a single margin was used for each individually deposited loan of a given type.  Upon implementation of the new collateral margins table, collateral margins assigned to individually deposited loans of a given type will be differentiated based on a loan’s coupon and maturity.  The new collateral margins table presents margin ranges for each loan type, and each range contains a link to the margin matrix for that loan type so that depository institutions may determine the specific margin applicable to an individual loan.

  • Margins assigned to group deposited loans no longer represent a lendable value percentage of the outstanding loan balance, but instead reflect simply the margin component of lendable value, and not the estimated fair value component. Depository institutions may contact their local discount window staff with questions regarding collateral value for a pledge of group deposited loans.

  • The column entitled “Lendable Value for Securities or Instruments if Market Price Not Available” is 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.

The new collateral margins will impact depository institutions’ collateral portfolio to varying degrees based on composition.  However, it is anticipated that very few depository institutions will need to increase their collateral pledges in order to support their current level of outstanding discount window borrowing.  The lag between this announcement and implementation of the new collateral margins will provide depository institutions time to pledge additional collateral if needed or desired.  As part of the normal process of working with depository institutions, Federal Reserve Banks will contact depository institutions whose pledged collateral will not be sufficient to support outstanding discount window loans or payment system risk collateral requirements under the new margins.

The Federal Reserve continues to accept as collateral a broad range of performing assets that depository institutions may hold and which can be valued either with third-party pricing or internal valuation models.

1. Including Term Auction Facility

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