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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: Paul Kern who wrote (84842)	8/12/2007 10:50:40 AM
From: Ken98	of 110194

That's correct, Fed only takes federal agency issued MBS, not the private-label junk. It is unusual though that they specified MBS only repo collateral. It is probably reasonable to assume that accepting only MBS collateral on Friday was not for the stated "operational simplicity" but rather a shortage of the more customary first 2 types of repo collateral. Prior to the Y2K snipe-hunt, MBS was not accepted as collateral. From a 1999 speech by Peter Fisher (FRB New York): <<To ensure our ability to meet elevated reserve needs and to encourage market liquidity around the turn of the year, we adopted several new measures. First, we extended the maximum maturity of our repo operations to 90 days. Second, we expanded the collateral we take in these operations to include mortgage-backed securities. Third, we shifted our normal settlement and custody arrangements for repo transactions to tri-party custodians. And fourth, we conducted seven auctions of options on repo transactions that can be exercised during the days around the year-end.>> <<By expanding the types of securities we accept as collateral in our repo operations, most importantly to include mortgage-back pass-through securities, we significantly increased the pool of assets from which we can draw to expand temporarily our balance sheet around the year end. Over the last five years, there have only been a handful of occasions when we wanted to add more reserves to the banking system than we were able to because insufficient amounts of securities were submitted by dealers in their propositions to the trading desk.>> <<Thus, broadening the pool of acceptable collateral helps ensure that we will be able to address reserve shortages of almost any imaginable size. It also puts us in a position where we can avoid taking Treasury securities out of the market just at a time when other market participants may be seeking to hold Treasuries around year-end as a credit substitute or simply because of a decline in the issuance of high-quality, short-term securities.>> newyorkfed.org

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