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Federal R eserve
B a n k o f N e w Yo r k
N E W Y O R K , N Y. 1 0 0 4 5
AREA CODE 212 701-6375
C hester
B.
Fe ld b e r g
April
18,
1979
V ic e P r e s i d e n t
To M e m b e r Banks
of the Second
in the Head O f f i c e T e r r i t o r y
F e d e r a l R e s e r v e D i strict:
The p u r p o s e of this letter is to bring
c e r t a i n acti o n s being taken by the R e s e r v e Banks
r e q u i r e m e n t s for the s u b m i s s i o n of c o l l a t e r a l to
window borrowings.
to your a t t e n t i o n
to l i b e r a l i z e
secure d i s c o u n t
Du r i n g 1978, the F e d e r a l R e s e r v e Sy s t e m u n d e r t o o k a b r o a d scale r e v i e w of d i s c o u n t w i n d o w collat e r a l , w i t h a v i e w to m o d e r n i z i n g
e x i sting p o l i c i e s and p r o c e d u r e s .
The study was u n d e r t a k e n b e c a u s e
of p r o b l e m s e x p e r i e n c e d by some m e m b e r b anks ( p a r t i c u l a r l y the larger
banks) in find i n g a d e q u a t e c o l l a t e r a l to se c u r e their b o r r o w i n g needs,
and in a n t i c i p a t i o n of the i m p l e m e n t a t i o n last N o v e m b e r of the new
T r e a s u r y Tax and L oan ("TT&L") I n v e s t m e n t Program, w h i c h has r e q u i r e d
m a n y banks to submit s u b s t a n t i a l a d d i t i o n a l c o l l a t e r a l for TT&L
p u rposes.
An o b j e c t i v e of the Sy s t e m study was to expand the pool
of c o l l a t e r a l a v a i l a b l e for d i s c o u n t w i n d o w purposes, and also t h e r e b y
to free c o l l a t e r a l for use in c o n n e c t i o n w i t h the TT&L program.
As a r e s u l t of the study, a nu m b e r of p o l i c y and p r o c e d u r a l
chan g e s are being impl e m e n t e d , e f f e c t i v e i m m e d i a t e l y .
A m a j o r change
wil l pe r m i t b anks w i t h a need for a d d i t i o n a l c o l l a t e r a l to use
r e s i d e n t i a l m o r t g a g e s held in their p o s s e s s i o n to se c u r e their
d i s c o u n t w i n d o w b o r r o w i n g s under s o - c a l l e d " o f f - p r e m i s e s c u s tody"
arrangements.
Under the F e d e r a l R e s e r v e Act, d i s c o u n t w i n d o w a d v a n c e s
secu r e d by m o r t g a g e s on o n e - t o - f o u r f a m i l y r e s i d e n t i a l p r o p e r t y ma y
be m a d e at the b asic d i s c o u n t rate.
The o f f - p r e m i s e s c u s t o d y
p r o c e d u r e could also be used in the case of other h i g h - v o l u m e , smalld e n o m i n a t i o n assets, w h i c h are b u r d e n s o m e to transfer and r e q u i r e
h eavy s e r v i c i n g .
As in the past, t h i r d - p a r t y cust o d y a r r a n g e m e n t s
w i l l also be p e r m i s s i b l e for c e r t a i n types of c o l l a t e r a l , such as
m u n i c i p a l s ecurities, w h i c h are held in s a f e k e e p i n g by anot h e r
m e m b e r bank.
In a d d i t i o n to the new o f f - p r e m i s e s c u s t o d y p r o c e d u r e ,
other chan g e s wil l pe r m i t use of loan p a r t i c i p a t i o n s and cert a i n
types of f o r e i g n c u s t o m e r notes as d i s c o u n t w i n d o w c o l l a t e r a l .
These
latter changes should p r i m a r i l y i n t e r e s t those banks that h ave used
d o m e s t i c c u s t o m e r notes as c o l l a t e r a l in the past.
(Over)
We r e c o g n i z e that the great m a j o r i t y of banks in the Second
F e d e r a l R e s e r v e D i s t r i c t have not e x p e r i e n c e d c o l l a t e r a l p r o b l e m s to
dat e and are able to s a t i s f y their r e q u i r e m e n t s thro u g h the use of
T r e a s u r y s e c u r i t i e s held in b o o k - e n t r y f orm at this Bank.
However,
for those banks that see a c u r r e n t or p r o s p e c t i v e need to expand
their pool of a v a i l a b l e c o l l a t e r a l , we w ould be p l e a s e d to discuss
the new c o l l a t e r a l ini t i a t i v e s .
If your b a n k has an i n t e r e s t in p u r s u i n g these m a t t e r s
furt h e r or has q u e s t i o n s w ith r e s p e c t to any other aspect of d i s c o u n t
w i n d o w a d m i n i s t r a t i o n , p l e a s e contact Eug e n e P. Emond, M a n a g e r ,
Credit and D i s c o u n t D e p a r t m e n t (Tel. No. 2 1 2 - 7 9 1 - 6 1 4 6 ) or Arnold Slansky
S p e c i a l A s s i s t a n t , Loans and Credits F u n c t i o n (Tel. No. 212 - 7 9 1 - 5 3 4 8 ) .
Y ours
sincerely,
Ches t e r B. F e l d b e r g
Vice President
@FedFRASER