The Federal Reserve Bank of New York ("NY Fed") issued a variety of explanatory materials on the workings of the Primary Dealer Credit Facility ("PDCF"). The PDCF was established under Section 13(3) of the Federal Reserve Act. It provides the Federal Reserve Board ("FRB") with emergency lending authority to companies other than depository institutions through broad-based programs and facilities that relieve liquidity pressures in financial markets. Documents issued by the FRB and the NY Fed regarding the PDCF include a news release, a term sheet, and FAQs.
In addition, a conference call was led by Patrick Dwyer, Assistant Vice President in the NY Fed Markets Group and Director of the Discount Window, who is responsible for overseeing lending facilities. The operations manager of the Bank of New York Mellon ("BNYM") also participated on the call. The credit facility will function through BNYM's ordinary systems for tripartite repo (i.e., post-trade processing including payments and deliveries, custody of collateral securities, collateral management and other operations).
The principal information communicated on the call was as follows:
Purpose of the Facility. The purpose of the facility is to support liquidity in the markets. In order to use the facility, primary dealers must make a representation generally to the effect that liquidity has been disrupted. The NY Fed does not interpret this to mean that the dealer is wholly unable to borrow, only that lending is not available on the same terms as it would be in a normal, well-functioning market. There is no pressure on primary dealers that do not wish to use the facility to make use of it.
Documentation. In order to make use of the facility, primary dealers will need to execute the required documentation, including signed collateral schedules. The documents then will need to be sent to BNYM, which will process them.
Economics. A loan may be for a term of up to 90 days, as instructed by the primary dealer. There is no dollar limit on the size of a trade, so long as the loan is adequately collateralized with eligible collateral. The rate will be 25 basis points, which may be changed at any time, but is expected to be maintained for a reasonable period.
Trade Mechanics. As a result of operational limitations, which the NY Fed is trying to resolve, a primary dealer may effect only a single trade, with a single maturity, on any day. Trades must be submitted by 2:30 p.m. ET on business days, but it is preferred that trades not be submitted at the last minute. Intraday substitution of collateral is acceptable. Trades will be effected through BNYM's ordinary systems for triparty repo.
Questions. Operational questions generally should be directed to a primary dealer's contact at BNYM. The NY Fed will take calls at a number given on the NY Fed's website, but they encourage primary dealers to use this outlet sparingly.
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