By Steven K. Beckner
(MNI) – In its Federal Register notice, the Fed expounds on the TDF
purpose and anticipated operations at considerable length.
“Term deposits are intended to facilitate the conduct of monetary
policy by providing a tool for managing the aggregate quantity of
reserve balances,” says the notice.
“The Board expects term deposits to be one of several tools that
could be employed to drain reserve balances and support the effective
implementation of monetary policy,” it goes on. “Term deposits drain
reserve balances because the funds that pay for the term deposits are
removed from the accounts of participating institutions for the life of
the term deposit.”
The notice anticipates that “reducing the quantity of reserve
balances should tighten the link between the interest rate the Federal
Reserve pays on excess reserve balances and other short-term interest
rates, resulting in improved control in implementing monetary policy.”
“Authorization of term deposits does not, however, preclude the use
of other tools to drain reserve balances,” it adds.
The Federal Register notice says that final determination of the
structure, amount and method for offering term deposits “depends largely
on related monetary policy discussions, including decisions regarding
the most effective way to drain the appropriate level of reserves.”
“As a result, the Board has determined to finalize the parts of its
proposal that facilitate the authorization of term deposits and to
reserve to a later date the final decisions regarding the manner in
which term deposits will be offered (for example, by auction, by open
offer or by some other method) and the details of those offerings,” it
said.
“Actual offerings of term deposits,” the Fed said, “will occur as
needed based on monetary policy objectives.”
“Details about the periods when term deposits will be offered will
be announced periodically in order to allow institutions to adjust their
use of this facility,” it said.
The Fed said interest rates on term deposits “could not exceed the
general level of short-term interest rates,” which it defined as
including “the primary credit (discount) rate and rates on obligations
with maturities of up to one year in which eligible institutions may
invest, such as rates on term federal funds, term repurchase agreements,
commercial paper, term Eurodollar deposits, and other similar rates.”
While saying that term deposits could be offered for up to one
year, the notice suggests that the terms will probably be shorter than
that. “In recognition of the demand to hold term deposits of varying
maturities, the Board expects that term deposits of more than one
maturity will be offered and that maturities of term deposits likely
will be six months or less,” it says.
The notice also says “the Board also expects that term deposit
maturities will be aligned with 14-day reserve maintenance periods.”
“Maturities will be announced in advance of a term deposit
offering,” it adds.
Despite comments from some firms that the Fed should permit early
withdrawals from the TDF, the Board decided against that.
“The Board believes,” says the notice, that “early withdrawal of
term deposits would weaken the ability of term deposits to serve as an
effective tool for draining reserve balances, and therefore would
undermine the effective implementation of monetary policy.”
“Accordingly, the Board expects that early withdrawals from term
deposits will not be permitted.”
The notice suggests a Board leaning toward auctions of term
deposits, but doesn’t exclude other methods.
“The Board expects that an auction mechanism may be the most
effective way to allocate term deposits in a manner that effectively
achieves the Federal Reserve’s monetary policy objectives,” it says, but
it adds, “Based on monetary policy considerations and experience with
the auction mechanism, the Board may consider offering term deposits
through different mechanisms.”
The notice makes clear that the Fed intends to communicate clearly
and prospectively the size of its reserve absorbing operations through
the TDF — a policy which MNI understands will also be followed with
regard to reserve draining operations generally.
“The Board anticipates announcing the terms and conditions of any
auction in advance, including the quantity of term deposits offered and
their maturity, any minimum and maximum bid amounts, and a
maximum-allowable bid interest rate,” says the notice.
However, it adds, “the Board does not expect to seek comment in
advance of changing the terms and conditions of term deposit offerings
unless those changes require amendments to Regulation D.”
It has not been decided yet whether multiple bids for term deposits
can be submitted. The notice says, “The Board is considering permitting
multiple bids per institution for term deposits and anticipates that, if
multiple bids are permitted, there will likely be some limit on the
number of bids an institution may submit.”
The notice goes on to stress that the Fed intends for the TDF to be
as inclusive as possible. “The Board expects to implement the term
deposit program in a way that promotes equitable access to term deposits
for institutions of all sizes, while most effectively meeting the
Federal Reserve’s monetary policy objectives.”
“Eligible institutions would not be required to maintain required
reserve balances at Reserve Banks in order to hold term deposits, nor
would they need to maintain a master account at a Reserve Bank in order
to participate in term deposit offerings,” it says. “The Board also
expects to set minimum bid amounts for term deposit offerings low enough
so as to not be a barrier to participation by smaller institutions.”
The Fed intends to strictly limit the use of TDF deposits as
collateral by participating firms: “The potential complexity of
administering pledges (and re-pledges) of term deposits as collateral to
third parties throughout the term of the deposit could be substantial.”
The Board does expect that institutions “will be permitted to use
their term deposits as collateral for discount window advances in order
to manage unanticipated funding needs,” the notice says. “This would
allow institutions to obtain liquidity from the Federal Reserve by
pledging term deposits or to obtain liquidity from other sources by
substituting term deposits for other types of collateral pledged to the
discount window that could then be pledged as collateral to secure
advances from Federal Home Loan Banks and other third parties.”
However, it says, “the Board does not expect to permit pledges of
term deposits to third parties.”
(2 of 2)
** Market News International **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]
