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F e d e r a l R e s e r v e Ba n k
of

Dallas

HELEN E. HOLCOM B
DALLAS, TEXAS

FIRST VICE PRESIDENT AND
CHIEF OPERATING OFFICER

752 65 -590 6

August 20, 1998
Notice 98-75

TO: The Chief Operating Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
New Methodology for
Determining Collateral Value of Assets
DETAILS
In September 1998, the Federal Reserve System and the U.S. Treasury will
implement changes to the methodology for determining the collateral value of assets that are
pledged to secure certain funds held by, or loaned to, depository institutions. Under the new
methodology, collateral values will be based on either the available market prices to which
margins will be applied, or where market prices are not available, margins will be applied to the
par or outstanding principal balance.
This new methodology will be used for all book-entry and definitive collateral held
by this Reserve Bank. It applies to all collateral pledged to the Federal Reserve System and the
U.S. Treasury for the following purposes:
•
•
•

Treasury Tax and Loan
Discount Window
Payment System Risk

Historically, credit quality has been the primary factor in determining both
acceptability of the collateral to Reserve Banks and the margins applied to the outstanding
principal. Beginning this fall, collateral values will be based either on an actual market price
adjusted by a margin to account for risks between repricing periods or on the outstanding
principal balance adjusted by a margin to account for various characteristics associated with a
particular asset. Collateral values may be more or less than the face or par value of the asset.
Instruments for which market prices are not available will be assigned collateral value
based on a valuation system developed by the Federal Reserve Banks. Various aspects of the
instrument will be assessed, including credit quality, interest rate, maturity date, liquidity, and

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

current rate environment. Based on this assessment, a “haircut” will be applied to the
outstanding principal to determine the collateral value.
The revised collateral valuation practice is scheduled to be implemented for all bookentry and definitive collateral simultaneously beginning September 21, 1998. Market prices for
securities and other obligations will be obtained from one or more securities pricing services.
Prices are scheduled to be refreshed at least weekly.
We are currently in the process of determining the impact of the revised methodology
on your institution’s collateral portfolio. Within the next several weeks, you will be contacted
should the change to your institution’s collateral value adversely affect your institution’s ability
to fully collateralize its Treasury, Tax, and Loan deposits or your ability to borrow from the
Reserve Bank.
MORE INFORMATION
If you have any questions, please contact the appropriate program representative
listed below.
Treasury Tax and Loan
Janie Worley
(214) 922-6761
Discount Window
Finlay Higgins
(214) 922-5335
Payment System Risk
PaulElzner
(214) 922-5590
If you need additional copies of this Bank’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely,


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102