On March 17, 2020, as part of an effort to facilitate credit during disruptions in economic conditions caused by COVID-19, the Board of Governors of the Federal Reserve System (Federal Reserve) reestablished a dealer credit facility last operated during the 2008 credit crisis – the Primary Dealer Credit Facility (“PDCF2020”).[1] Available starting on March 20, 2020, PDCF2020 is a loan facility providing credit to primary dealers who in turn are making credit available to businesses and households. As with the Commercial Paper Funding Facility also reintroduced on March 17, the Federal Reserve established PDCF2020 using its powers under Section 13(3) of the Federal Reserve Act for “unusual and exigent circumstances,” which under the Dodd-Frank Act required the approval of Treasury Secretary Steven Mnuchin.[2] PDCF2020 is being administered by the Federal Reserve Bank of New York (“FRBNY”).[3]

PDCF2020 is available only to the FRBNY’s primary dealers, of which there currently are 24.[4] These large financial institutions, which include large investment banks and specialized, standalone broker-dealers, are the FRBNY’s trading counterparties in its implementation of monetary policy, and are expected to make markets for FRNBNY as needed and bid in Treasury auctions.

PDCF2020 allows for the provision of term financing to primary dealers for up to 90 days. The facility that the Federal Reserve ran between 2008 and 2010 provided only overnight loans. The FRBNY will charge its primary credit rate at the time the financing is put in place. The primary credit rate at this writing is 0.25%.

The primary dealers are required to collateralize their PDCF2020 financing. The FRBNY is allowing a wide range of investment-grade debt securities and equity securities as collateral. Eligible debt securities include U.S. Treasuries, direct U.S. government-sponsored enterprise obligations, agency and private-label mortgage-backed securities, municipal and corporate bonds, asset-backed securities, AAA CLOs, and international agency securities. In addition, the FRBNY has recourse beyond the collateral to the primary dealer entity itself.

On March 18, 2020, the FRBNY communicated to primary dealers that, given the need to have PDCF2020 operational on March 20, 2020, the financing under PDCF2020 would be in the form of repurchase transactions. No timeframe was indicated with respect to how long the exclusive form of financing under PDCF2020 would be in the form of repurchase transactions.

The PDCF2020 repurchase transactions will be governed by the existing master transaction documentation that primary dealers have with the FRBNY. Primary dealers interested in obtaining financing have been instructed by the FRBNY to contact the triparty repo custodian and indicate the par amount of collateral that it is interested in financing and the desired repurchase transaction term, up to 90 days.

The FRBNY has advised primary dealers that PDCF2020 is not available for collateral with a “close link” between the security or other asset and the primary dealer. The term “close link” is defined in documentation provided by the FRBNY to primary dealers as a security or other asset that is an obligation of (1) the primary dealer or (2) an “affiliate” of the primary dealer.

PDCF2020 will be available to primary dealers “for at least six months, or longer if conditions warrant,” the FRBNY has said.

The FRBNY published a Term Sheet when it announced the relaunch of the facility, and published FAQs on March 19, 2020.[5]

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[1] Federal Reserve Board announces establishment of a Primary Dealer Credit Facility (PDCF) to support the credit needs of households and businesses (Mar. 17, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317b.htm.

[2] 12 U.S.C. § 343(3) (as modified by Section 1101 of the Dodd-Frank Act).

[3] FRBNY, Primary Dealer Credit Facility (Mar. 19, 2020), https://www.newyorkfed.org/markets/primary-dealer-credit-facility.

[4] FRBNY, List of Primary Dealers (Nov. 13, 2016), https://www.newyorkfed.org/markets/primarydealers.

[5] Federal Reserve, Term Sheet for Primary Dealer Credit Facility (PDCF) (Mar. 17, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200317b1.pdf; FRBNY, FAQs: Primary Dealer Credit Facility (Mar. 19, 2020), https://www.newyorkfed.org/markets/primary-dealer-credit-facility/primary-dealer-credit-facility-faq.