Alert June 30, 2009

FRB Extends and Modifies Liquidity Programs

The FRB made changes to a number of its extraordinary lending programs, extending many into next year while also closing one and shrinking others. Originally set to expire October 31, 2009, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AMLF”), the Commercial Paper Funding Facility (“CPFF”), the Primary Dealer Credit Facility (“PDCF”), and the Term Securities Lending Facility (“TSLF”) were extended through February 1, 2010. The FRB also extended its temporary reciprocal currency arrangements with 14 other central banks until February 1, 2010. The FRB did not alter the December 31, 2009 expiration date for the Term Asset-Backed Securities Loan Facility.

Though usage of the AMLF has declined considerably, the FRB stated that the AMLF would continue because of ongoing market fragility. However, in order to ensure the AMLF is used as intended, i.e., to provide a temporary liquidity backstop to money market mutual funds, the FRB established a redemption threshold under which a money market mutual fund would have to lose at least 5 percent of net assets in a single day or 10 percent over the prior five business days before it can access the AMLF. The FRB also extended the CPFF through February 1, 2010 to help ensure short-term funding access for U.S. businesses, even though the CPFF is seeing declining usage as its rates become less attractive to many borrowers. With the AMLF and CPFF still in place, the FRB opted not to renew the Money Market Investor Funding Facility, which was never used and will expire on October 31, 2009.

The FRB suspended TSLF auctions backed by Schedule 1 collateral (which includes Treasury securities, agency debt, and agency mortgage-backed securities eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York's Open Market Trading Desk ) and the TSLF Options Program (“TOP”). There have been no bids since March for one-month securities loans in exchange for Schedule 1 collateral. Recently, the TOP has also failed to attract interest. The FRB will continue with TSLF auctions for Schedule 2 collateral, which includes Schedule 1 collateral plus investment-grade corporate, municipal, mortgage-backed, and asset-backed securities. TSLF auctions backed by Schedule 2 collateral will now be conducted every four weeks, rather than every two weeks, and the total amount offered under the TSLF will be reduced to $75 billion. Even though no obligations are currently outstanding under the PDCF, it is being extended as a liquidity backstop.

The FRB also announced that the amounts auctioned at the biweekly auctions of the Term Auction Facility (“TAF”) will be reduced to $125 billion from $150 billion, effective with the July 13 auction. The FRB indicated that amounts available under the TAF, which has no scheduled end date, could be lowered further at a gradual rate. Though its usage is declining, the FRB is extending its dollar liquidity swap arrangements through February 1, 2010 with the central banks of Australia, Brazil, Canada, Denmark, the United Kingdom, the European Union, Korea, Mexico, New Zealand, Norway, Singapore, Sweden and Switzerland. Foreign currency swap lines are also being extended with the Bank of England, the European Central Bank and the Swiss National Bank. Separately, the Bank of Japan is still considering whether to extend its swap arrangements.