Federal Reserve Board Forms Primary Dealer Credit Facility
Posted on 03/18/2020
Federal Reserve Board informed the public that it will create a Primary Dealer Credit Facility, or PDCF. The facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. The interest rate charged will be the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
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Term Sheet for Primary Dealer Credit Facility (PDCF)
Borrower Eligibility
Only primary dealers of the New York Fed are eligible to participate in the PDCF.
Eligible Collateral
Collateral eligible for pledge under the PDCF includes all collateral eligible for pledge in open market operations (OMO);1 plus investment grade corporate debt securities, international agency securities, commercial paper, municipal securities, mortgage-backed securities, and asset-backed securities;2 plus equity securities.3
Foreign currency-denominated securities are not eligible for pledge under the PDCF at this time.
Collateral that is not priced by the clearing bank will not be eligible for pledge under the PDCF.
Additional collateral may become eligible at a later date upon further analysis.
Term
Loans will be made available to primary dealers for a term of up to 90 days.
Rate
Loans made under the PDCF will be made at a rate equal to the primary credit rate in effect at the New York Fed offered to depository institutions via the Discount Window.
Prepayment
Borrowers may prepay loans at any time.
Time of Day
During Fedwire hours.
1. An addition to OMO-eligible securities are Treasury strips.
2. For the following securities types, only AAA-rated securities are accepted: commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs), and collateralized debt obligations (CDOs). Other eligible securities as specified above are accepted if rated investment grade (such that BBB- securities and above). Specifically, investment grade commercial paper is accepted: commercial paper rated both A1/P1 and A2/P2.
3. The following equities would not be eligible: exchange traded funds (ETFs), unit investment trusts, mutual funds, rights and warrants.
Custody Rules and Arrangement
Dealers will communicate their demand for funding to their clearing bank. The clearing bank will verify that a sufficient amount of eligible collateral has been pledged by each primary dealer participating in the PDCF and notify the New York Fed accordingly.
Once the New York Fed receives notice that a sufficient amount of margin-adjusted eligible collateral has been assigned to the New York Fed’s account, the New York Fed will transfer the amount of the loan to the clearing bank for credit to the primary dealer.
Collateral Valuation
The pledged collateral will be valued by Bank of New York Mellon according to a schedule designed to be similar to the margin schedule for lending by the Discount Window, to the extent possible.
Loan Size
Loans will be limited to the amount of margin-adjusted eligible collateral pledged by the dealer and assigned to the New York Fed’s account at the clearing bank.
Recourse
Loans made under the PDCF are made with recourse beyond the pledged collateral to the primary dealer entity.
Program Termination
The PDCF will remain available to primary dealers for at least six months, or longer if conditions warrant.
Source: Federal Reserve
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Keywords: Federal Reserve System