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FIRMA April 26-30, 2009

Learn about the Federal Reserve’s key functions, liquidity facilities, asset-backed commercial paper measures, and supervisory topics for fiduciaries. Stay informed on recent actions and implications for financial institutions.

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FIRMA April 26-30, 2009

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  1. FIRMA April 26-30, 2009 Donna M. Fay Federal Reserve Bank Of Atlanta

  2. Disclaimer Any views I express are my own and not those of the Federal Reserve Bank of Atlanta, my colleagues in the Federal Reserve System or the Board of Governors

  3. Outline • Purpose of Federal Reserve • Recent Federal Reserve actions relevant to Fiduciaries • Fiduciary Supervisory Topics • Relevant SR Letters • Questions

  4. Purpose The purpose of the Federal Reserve is to foster a flow of credit and money that will facilitate orderly economic growth, a stable dollar, and long-run balance in our international payments The Federal Reserve System Purpose and Function 1963

  5. Mission Today, the Federal Reserve's duties fall into four general areas: • conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates • supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers • maintaining the stability of the financial system and containing systemic risk that may arise in financial markets • providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

  6. Total Assets of Federal Reserve

  7. Selected Assets of Federal Reserve

  8. Credit Extended Federal Reserve

  9. Select Liabilities of Federal Reserve

  10. Discount Window • Section 10B of Federal Reserve Act • Primary Credit • Secondary Credit • Seasonal Credit • Term Auction Facility (TAF)

  11. TAF • December 17, 2007 Auction • $20 billion auction • $61 billion propositions submitted • March 23, 2009 Auction • $150 billion auction • $101 billion propositions submitted

  12. Liquidity Facilities The Federal Reserve extended through October 30, 2009, its existing liquidity programs that were scheduled to expire on April 30, 2009.  The Board of Governors and the Federal Open Market Committee (FOMC) took these actions in light of continuing substantial strains in many financial markets. February 3, 2009 Press Release

  13. Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF or "the Facility") • The Federal Reserve Board on Friday January 30, 2009, announced two final rules pertaining to the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), which extends loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds. • The first rule provides a temporary limited exception from the Board's leverage and risk-based capital rules for bank holding companies and state member banks. The second rule provides a temporary limited exception from sections 23A and 23B of the Federal Reserve Act, which establish certain restrictions on and requirements for transactions between a bank and its affiliates. • The two final rules, originally approved as interim final rules on September 19, 2008, will facilitate participation by depository institutions and bank holding companies as intermediaries between the AMLF and money market mutual funds. These exceptions are subject to various conditions to promote safety and soundness.

  14. Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF or "the Facility") • borrow funds from the AMLF to fund the purchase of eligible ABCP from a MMMF under certain conditions • The AMLF program is authorized under Section 13(3) of the Federal Reserve Act • borrow against ABCP purchased from an MMMF on or after September 19, 2008 • Eligible borrower can purchase paper from a proprietary fund • borrower can buy from a qualified fund ABCP that was issued by a program for which the borrower serves as the sponsor and pledge that paper under this facility • Because bank holding companies and state member banks will bear no credit or market risk in their holdings of ABCP under this facility, the holdings will not be assessed any regulatory capital charge. • Risk transfers to FRB Boston upon completion of certain steps

  15. Parent CompanyImpact • Over $20 billion in support from parent company • Purchases of ARS from clients or funds • Capital support agreements (CSA) for MMMFs • Liquidity Protected Preferred shares • Parent company letters of credit • Parent company notes • CSAs being extended to end of 2009

  16. Fiduciary Supervisory Topics • Asset/Investment Management • Securities Lending • Corporate Trust • Push-out Provisions and Regulation R Compliance • Counterparty Risk • Elevate nonbank risk to parent • Engage functional regulators

  17. Asset/Investment Management • Portfolio management, investment policies and limits, client communications and disclosures • Strategic decisions • Evaluate liquidity stress of portfolios • Effective investment review process • Robust due diligence practices

  18. Securities Lending • Monitor progress of mergers • Commingled securities lending cash reinvestment pools • Valuation issues • Liability to mutual funds or common/collective funds as investors • Legal and reputational risks of losses • Audit restrictions of client withdrawals

  19. Corporate Trust • Revenue impact of decreasing business • Issuer defaults and deteriorating financial condition • KRIs to identify operational stresses • Evaluate extent of credit provided to issuers • DTCC processing changes

  20. Other Supervisory Topics • Pushout and Regulation R • Counterparty risk • Custodians and subcustodians • Clearing firms • Brokers • Strategic partnerships • Communicate nonbank risk to parent

  21. SR Letters • 08-09 Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations • 08-08 Compliance Risk Management Programs and Oversight at Large Banking Organizations with Complex Compliance Profiles • 08-07 Interagency Examination Procedures for the Identity Theft Red Flags and Other Regulations under the Fair Credit Reporting Act • 07-15 Release of the Revised Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual • 99-7 Supervisory Guidance Regarding the Investment of Fiduciary Assets in Mutual Funds and Potential Conflicts of Interest

  22. Questions?

  23. References http://www.federalreserve.gov/aboutthefed/default.htm http://www.frbdiscountwindow.org/mmmf.cfm?hdrID=14#f1 http://www.clevelandfed.org/research/data/credit_easing/index.cfm

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