| WASHINGTON -(Dow Jones)- The Federal Reserve announced a new policy Thursday that will deprive Fannie Mae ( , Freddie Mac and the Federal Home Loan Banks of billions of dollars in cash management wiggle room during the business day.
Starting in July 2006, the Fed will clamp down on the amount of intraday credit, also known as "daylight overdraft," that it provides to government- sponsored enterprises and international financial institutions. The new policy has two prongs: one affecting securities and the other affecting general corporate activity.
In a nutshell, the new policy means the GSEs will have to pay up front for any cash payments the Fed makes on their behalf. Under current policy, the Fed often makes these payments hours before the GSEs provide the money behind them.
All three housing GSEs said they are reviewing the proposal. The new policy covers about 10 institutions, but it primarily will affect the three housing GSEs because they are such active debt issuers.
"We look forward to completing our analysis and making our comments known in due course," said Freddie Mac ( FRE , news ) spokesman Michael Robinson.
The new policy ends the GSEs' 10-year exemption from the Fed's daylight overdraft fees, imposed in 1994. The Fed said that markets have now adjusted, allowing the central bank to reconsider its exemption for GSEs. Also, daylight overdraft use has skyrocketed over the past decade.
In 2003, the peak aggregate overdraft was $145 billion for GSEs and similarly treated organizations. This compares with a peak aggregate of less than $20 billion when the Fed launched its overall daylight overdraft policy, the Fed said.
The Fed said its policy toward GSEs and similarly treated institutions needs to be more in line with its approach toward the private sector. The current practice "is inconsistent with that of private issuing and paying agents for their customers' securities," the central bank said.
When the new policy kicks in, GSEs and others will need to make sure their accounts at the Fed are fully funded by the time the payments are due. Otherwise, the Fed could delay interest and redemption payments to bondholders, which are normally paid at 9:15 a.m. ET.
Under current policy, the Fed will make interest and redemption payments to bondholders even if the issuers' Fed account isn't fully funded. The value of payments covered by this practice has "grown significantly over the past 10 years," the Fed said.
Bond markets are expected to digest the changes without too much trouble, once the GSEs have adjusted. "I don't think this will have a big impact on the market or cause any major disruptions in how they pay coupon on their securities," said Eric Foster, the Bond Market Association's vice president and associate general counsel.
In other changes, the Fed plans a broader crackdown on daylight overdraft used during corporate business over the course of a day. The affected institutions will be held to the same standards as private-sector firms that don't have regular access to the Fed's discount window, which the Fed uses to provide emergency credit to banks.
"Such treatment includes strongly discouraging daylight overdrafts and applying a penalty fee to daylight overdrafts that nonetheless result from these entities' general corporate payment activity," the Fed said.
Fannie Mae said in a statement that it will work to make any needed adjustments over the next two years, until the policy kicks in. "We will be thoroughly reviewing the proposal and providing comment," Fannie Mae said. "Of course, we would work with the Fed to implement any operational change as smoothly as possible."
A spokesman for the Federal Home Loan Banks' Office of Finance said their system also was reviewing the proposal. The Fed has asked for comment by April 16, 2004.
The Fed's 12 Reserve Banks act as fiscal agents for a number of GSEs: Fannie Mae , Freddie Mac , the Federal Home Loan Bank System, the Farm Credit System, Farmer Mac and Sallie Mae. Also, the Fed acts as fiscal agent for several international financial institutions: the World Bank, the Inter-American Development Bank, the Asian Development Bank and the African Development Bank.
A spokesman for the Farm Credit Administration, which oversees the Farm Credit System, said the FCA would make sure its system is in compliance with the Fed policy. The Farm Credit System is much smaller than the housing GSEs and isn't expected to be significantly affected.
-By Rebecca Christie, Dow Jones Newswires; 202 862 9249; rebecca.christie@ dowjones.com
Dow Jones Newswires 02-05-04 1731ET |
