FACTBOX: Fed enhances liquidity tools, backs money funds

CHICAGO (Reuters) - The U.S. Federal Reserve has unveiled a raft of measures in recent months to enhance liquidity tools aimed at easing strains in credit markets that have been hammered by losses from subprime mortgages.

SHORING UP MONEY MARKET MUTUAL FUNDS, MORTGAGE DEBT

The Fed on Sept 19 said it will open its discount window to financial institutions to allow them to buy certain assets from money market mutual funds. Non-recourse loans will be offered at the primary credit rate to finance purchases of asset-backed commercial paper (ABCP). This should help funds that hold such paper meet demands for redemptions by investors and boost liquidity in the ABCP markets and broader money markets. The move came in step with a $50 billion pledge from the U.S. Treasury to bank money market mutual funds.

The Fed also announced plans to purchase federal agency discount notes from primary dealers. Those notes are short-term debt obligations issued by Fannie Mae and Freddie Mac, which were seized by the government on September 7, and the Federal Home Loan Banks.

INCREASE IN SWAP LINE WITH OTHER CENTRAL BANKS

The Fed on Sept 18 made an extra $180 billion available to other major central banks to lend to their local commercial banks in a bid to get U.S. dollars circulating in overnight and short-term money markets. The move brought to $247 billion the total amount of dollars the Fed was providing to other central banks, an almost threefold increase. The increased swap lines amount to up to $110 billion with the ECB, up $55 billion, and up to $27 billion by the Swiss National Bank, up $15 billion. New swap facilities were authorized with the Bank of Japan for up to $60 billion; the Bank of England for up to $40 billion; and the Bank of Canada for up to $10 billion. The swap arrangements were authorized through January 2009.

PRIMARY DEALER CREDIT FACILITY (PDCF)

The Fed said that "in light of continued fragile circumstances in financial markets" it would extend this facility until January 30. The measure, introduced on March 16 for an initial six months, allows investment banks overnight access to the Fed's discount window for lender-of-last-resort cash. This was the first time since the Great Depression that the Fed had lent money directly to investment banks it did not regulate, and the move highlighted the gravity of conditions facing the financial system around the time of the rescue of investment bank Bear Sterns by JPMorgan Chase. Loans under the PDCF are collateralized by investment-grade securities.

AUCTION OF TERM SECURITIES LENDING FACILITY (TSLF) OPTIONS

The Fed has authorized the Federal Reserve Bank of New York to auction options for primary dealers to borrow securities from the Term Securities Lending Facility (TSLF). The amount will be for up to $50 billion of draws on the TSLF, and will be collateralized by the full range of investment-grade assets that qualify for regular TSLF auctions. The Fed said the options will be for exercise ahead of periods when market conditions have become stressed, like quarter-ends. The $50 billion option draws will be in addition to the $200 billion that may be offered under regular TSLF auctions.

TERM SECURITIES LENDING FACILITY (TSLF)

Under the TSLF, the Federal Reserve Bank of New York conducts weekly auctions of 28-day loans of Treasury securities to primary dealers. Loans under the TSLF are collateralized by a range of government and private securities.

84-DAY TERM AUCTION FACILITY (TAF) LOANS

In addition to the existing 28-day Term Auction Facility loans, the Fed will offer an 84-day TAF credit to depository institutions which the central bank regulates. Starting from August 11 the Fed will conduct bi-weekly TAF auctions, alternating between auctions of $75 billion of 28-day credit and $25 billion of 84-day credit. The Fed also said that during a transition period the scale of the 28-day TAF auction would be reduced to keep the amount of TAF credit outstanding at $150 billion. The 28-day TAF was launched on December 12. The Fed accepts the same broad range of collateral at the TAF as it does at the discount window, including home mortgages and mortgage-backed securities.

TERM REPURCHASE AGREEMENTS

The Fed on March 7 announced a series of 28-day repurchase transactions for primary dealers, expected to add up to $100 billion. Eligible collateral is the same as for open market operations.

DISCOUNT WINDOW

The discount window is the Fed's traditional way of providing liquidity to commercial banks and other deposit-taking institutions that it regulates. The Fed's first liquidity salvo was on August 17 when it unexpectedly lowered the discount rate by a half-percentage point, narrowing the spread above the benchmark federal funds rate -- the rate banks charge each other for loans -- to a half-percentage point.

* The Fed also extended the term of financing to 90 days for institutions in good standing. It refers to this facility as the Term Discount Window Program. Narrowing the spread between the discount rate and the fed funds rate is aimed at erasing the stigma attached to using the discount window, which in the past has signaled an institution in distress.

* The Fed on March 16 again narrowed the spread between the discount rate and the fed funds rate to a quarter-percentage point, where it remains.

As of the Fed's last policy-setting meeting September 16, the discount rate stands at 2.25 percent, while the fed funds target is 2 percent.

The Fed accepts a broad range of collateral for loans at the discount window.

OTHER TRADITIONAL TOOLS

The Fed also provides liquidity through its traditional open market operations and securities lending to primary dealers. The loans of funds or Treasury securities are typically overnight repurchase agreements against collateral of Treasuries, agencies, or agency MBS.

Sources:

Federal Reserve here

New York Fed here