FACTBOX: Mechanics of the Fed's Bear Stearns rescue plan

NEW YORK (Reuters) - Following are details on how the Federal Reserve Bank of New York's planned rescue of Bear Stearns Cos. Inc. is intended to work. JPMorgan Chase & Co has agreed to provide secured funding to Bear, as necessary, for up to 28 days, through borrowings from the Fed's discount window.

THE DISCOUNT WINDOW:

The discount window is where banks in need of short term funds can borrow directly from the Fed. But Bear Stearns is a non-depository institution and ineligible to borrow directly at the Fed's discount window, Fed staff said.

Since Bear Stearns is not entitled to go to the discount window, JPMorgan, a bank, "is acting as a conduit, to go to the discount window and lend to Bear Stearns," said Kenneth Kim, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.

The interest rate on Fed discount window loans is known as the discount rate and is currently 3.5 percent. The rate is set by the Federal Reserve Board, normally in conjunction with the benchmark federal funds target rate, which is now 3.0 percent.

Both of these rates will be reviewed by the Fed at its March 18 policy meeting.

COLLATERAL FROM BEAR STEARNS:

JPMorgan will post collateral from Bear Stearns at the discount window and the Fed is looking to Bear Stearns collateral to repay the loan, and not to JPMorgan, Fed staff said.

COLLATERAL THE FED ACCEPTS:

At the discount window, these are some of the types of collateral the Fed can accept in exchange for making short term loans, according to the New York Fed Web site:

U.S. Treasury securities

Agency debt

Corporate bonds

Mortgage-backed securities (includes agency and so-called "private label" or non-agency MBS).

PURPOSE OF THE DISCOUNT WINDOW:

"The Discount Window functions as a safety valve in relieving pressures in reserve markets; extensions of credit can help alleviate liquidity strains in a depository institution and in the banking system as a whole. It also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress," according to the New York Fed Web site.