Circular

New Margins for the Valuation of Collateral

September 17, 2002
Circular No. 11466

To All Depository Institutions and Others Concerned in the Second Federal Reserve District:

Attention: Treasurer

The Federal Reserve System (FRS) periodically re-assesses the margins that are used in the valuation of collateral pledged to the U. S. Treasury and the Federal Reserve for Treasury Programs, Discount Window, and Payments System Risk purposes. This re-assessment helps to ensure that the collateral margins reflect current market conditions. These margins are used to account for various risks and are applied both to priced and to non-priced pledged collateral.

In the recent re-evaluation the FRS has enhanced its valuation process for securities that are priced by the FRS's pricing vendor. The FRS margins have always been based on the interest rate sensitivity of the security, which is also known as the duration of the security. However, in this reassessment, margins were created for each type of priced security based upon three levels/buckets of duration (0 to 5, >5 to 10, >10). To illustrate, when a security is pledged as collateral, the FRS will obtain the price and duration of the security from its pricing vendor and apply the margin according to the duration bucket within which the security falls.

The updated margins for priced and non-priced collateral will be effective September 30, 2002 and are posted on the Federal Reserve System's website at www.frbdiscountwindow.org. Please reference the table at the website periodically as it will always contain the most current version of the margin table, reflecting any changes in the acceptable asset types and associated margins.

The collateral margins for Treasury purposes will be distributed under separate cover by the St. Louis Federal Reserve Bank. The margin tables for Treasury Programs can be found on the Bureau of Public Debt website at www.publicdebt.treas.gov/gsr/gsrttl.htm#ttl.

The Federal Reserve System recently prepared information to assist banks in pledging collateral. The Guide to Discount Window Collateral can be found at www.frbdiscountwindow.org the same site as the margin tables.

If your institution has questions regarding valuation or acceptability of assets as collateral for Discount Window or Payments System Risk purposes or regarding any of the information contained in this notice, please contact Javier Jerez and Peter Ensmenger.

William A. Walsh
Discount Officer