Fed's 2020 Quantitative Easing Debunked by the1uploader

Fed's 2020 Quantitative Easing Debunked by Sando Sasako Jakarta, 24 March 2020 06.09 Last update: 18 April 2020 13.16+07.00 In the old days, legal justice is preserved by and through the division of legal power. Legal power is separated into the legal making (legislative body, regulator), executive, and judiciary. Nevertheless, the trias politica concept of Montesquieu has developed into many branches. It evolves through the polarised views, interests, and purposes of both opponents and proponents, the rich and the poor. The concepts of legal and/or justice are vague. The preservation of any is political and subjective in nature. Democracies occur when the ruler (regime) and the ruled are equal, power-balanced and in the same page. Some society’s preservation can be based on the chosen social identity, interests, purposes on religious, ideological, political, economic, social, cultural matters. Democracy is doomed and ceases to exist when a country, a business, or the similar, is led by a small number of groups or people. The oligarchs usually implement cruel and nasty tenets such as fascism, absolutism, authoritarianism, despotism, terrorism, totalitarianism, autocracy, coercion, domination, high-handedness, imperiousness, monocracy, oppression, peremptoriness, reign of terror, severity, totality, unreasonableness. In short, opponents are not allowed to exist.

The $1,200 Hush Money against The Funneled $454b In the case of the Fed’s last quantitative easing policy, the Fed has become the judge, the jury, and the executioner. Subjective considerations are put on top. Deals behind the closed doors and behind the scenes are some things that must be kept from prying eyes. Yet, forensic audit of public records provided by the Fed can reveal what were the deals. The FOIA is the law that pushes the Fed to open and publish any financial records in regard to the monetary policies taken. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows FRB to conduct (secret) meetings without regard to the requirements of section 552b of title 5, United States Code, during the period beginning on the date of enactment of this Act and ending on the earlier of the termination of the national emergency status or by the end of 2020. It is in Sec. 4009 – Temporary Government in the Sunshine Act relief. The stimulus bill also relieves the Fed to provide lending and ESF limitless, allow credit losses and troubled debt restructurings, and most of all, unauditable or zero oversight. The undetailed $454b slush fund will be chanelled through SPVs making loans and loans guarantees. Cumbersome and overwhelming eligibility criteria is applicable for individuals to get $1,200 hush money and free $10k advances for small businesses (SMEs) of the total $3b budget. A $10m loan is forgivable for eligible SMEs to participate in Paycheck Protection Program (PPP) of a $400m plafond. The $454b funnelled by SPVs empowers the Fed to conceal its toxic assets by 10 times. The additional $4t lending power enables the Fed to keep its dark pools off its balance sheet. This Fed’s move was ridiculed by Pam and Russ Martens. Before the pandemic covid-19 matters, the Fed has dumped more than $9t cumulatively to prop up Wall Street’s trading houses since 17 September 2009. The sunshine law request is meant to keep the public in the dark, at least until the pandemic is declared over and/or by the end of 2020. Yet, doctored and falsified documents have become a habit to hide the scandalous real things. The explicit request was made by the Fed as it had learnt its lost in court against FOIA upon the first operation twist and 2 quantitative easing monetary policy up to December 2011.

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The $2.2t Relief Bill The PPP loan is a part of $2.2t stimulus package. Yet, many have predicted that the money won’t be realised until May 2020. Many have crunched the numbers according to their own vested interests, either disclosed or not. Rounding the numbers are like pigeon-holing. Some may classify and base on status such as SMEs ($370b), HHs ($250b), unemployed ($250b), distressed companies ($500b), states and localities ($150b), and health care systems ($150b). Some others crunch by the vehicles such as TALF ($100b), PMCCF ($100b), SMCCF ($100b). In 2008, the similar CPFF peaked at $350b, MMLF at $150b, and PDCF at $150b. The $500b lending program is allocated for airline industry ($25b, B1 loans), air cargo carriers ($4b, B2 loans), national security concerns ($17b, B3 loans), states and localities ($150b). Ground handling suppliers, such as baggage, catering, ticketing, cleaning, to airline industry gets $3b. The $500b fund is special as it is not allowed to be used by federally elected officials and their immediate relatives. That includes businesses owned in full or partly by POTUS, the VP, the head of an Executive department, or a Member of Congress; and the spouse, child, son-in-law, or daughter-in-law. In line with liquidity provision, the Fed made FX swap lines up to $450b with 14 central banks with overnight index swap rate plus 25 bps. The Fed’s counterparts are Canada, UK, Japan, ECB, Switzerland, Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway, and New Zealand. The last 3 parties are limited to $30b, whilst the others are limited to $60b. The Sitrep Call Signs – The Corona Zeitgeist The impacts of the casualties over chinese virus are more than frenetic, both in the financial markets and real sector, as it affects human lives on a daily basis. The circulating and trending buzzwords are plenty enough. the following buzzwords are not limited to what’s mentioned below. In the financial sector, the buzzwords are: 1. markets going feral, haywire, jitter, anxious, tailspin, reeling, lurch 2. unprecedented volatility, uncharted territory 3. crash, faltered, plunged, meltdown, bloodbath, dire, sell-offs, cash-out, assets wiped out 4. liquidity crunch, drawdowns in credit facilities, extensive margin calls across the industry In the real (economy) sector, the buzzwords are: 1. demand destruction, decimated 2. corporate defaults, global recession 3. unemployement, upending life 4. busted, halted, ailing, economic shutdown, economic restart, economic reset 5. stay at home compensation, cash crunch 6. cushion the blow, economic rescue, stimulus, bailout

The Money Printing Vehicles The unlimited QE will be carried on by Blackrock Inc. with the expansion of 3 facilities recently set and the establishment of 1 fund and 3 other facilities. The interoperability of these schemes has a say that the Fed as the money printer, Treasury as the rubber stamper, Blackrock as the trader and admin, and POTUS seizes the power on both monetary and fiscal instruments.

Fed's 2020 Quantitative Easing Debunked

The newly established vehicles comprised of 2 corporate credit facilities (PMCCF and SMCCF), TALF, and ESF. PMCCF and SMCCF stand for Primary Market and Secondary Market Corporate Credit Facilities. TALF stands for Term ABS Loan Facility. ESF stands for Exchange Stability Fund. The expanded facilities set not long after the 0% fund rate set, were CPFF, PDCF, and MMLF. CPFF and PDCF were set on 17 March, whilst MMLF was set on 18 March. CPFF stands for Commercial Paper Funding Facility. PDCF stands for Primary Dealer Credit Facility. MMLF stands for Money Market Mutual Fund Liquidity Facility. Let’s see what was claimed by Treasury Secretary Steven Mnuchin that the cost of CPFF could be as high as $1t, but did not expect it to rise so high. The Treasury will provide $10b of credit protection to the Fed for the CPFF from the Treasury’s ESF. The trickery IOU system and mechanism is in play, with the Fed committing large-scale asset purchase (LSAP).

SMEs and Individuals Indebted corporates and financial institutions are the main focus of the Fed, but not the SMEs and individuals. SBA-related loan mechanism and p2p lending business, imho, appears to be carried on by fintech companies. Along with other federal financial agencies such as CFPB, CSBS, FDIC, NCUA, OCC, the Fed allows financial institutions to downgrade their outstanding loans and put into troubled debt restructuring (TDRs) program. The allowed terms are past-due and non-accrual loans such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in insignificant payments. In the meantime, banks are also allowed to use impermissible capital reserves. Likewise the restriction of total loss absorbing capacity (TLAC). Financial assitances to troubled SMEs is to be addressed with MSBLP (Main Street Business Lending Program). Not all SMEs, but the eligible ones. The eligible criteria is cumbersome and overwhelming. Likewise the individuals. Details of the implementation and date is still TBD. Under HR-748 bill aka CARES Act, SMEs have a loan plafond up to $349b. Named by Paycheck Protection Program (PPP), the mechanism used is SBA’s section 7(a) loan program. Some concise and brief details were provided by Arora. Fed’s play tools Interest rate, quantitative easing, and treasury twist are the most common Fed’s play tools. Formally, they are termed by the discount rate (on federal fund rate), open market operations, and reserve requirement. Just don’t be fooled around by lots of bureaucratic jargon and an alphabet soup of acronyms. Slashing the fund rate by 1% (100 bps) to 0-0.25% on 15 March 2020 was the latest move of the Fed. The fund rate is the target for the overnight interest rate on lending between commercial banks. Alas, the markets reacted so badly, rendering and actualising the ineffective, impotence, and useless Fed’s move. Fed’s latest move signifies its irrelevance existention over real-life economic problems and situations. The CBOE VIX shot to the roof, recording its ATH to the level of 82.69 on the next day. As the current fund rate ranges from 0-0.25%, the lesser space and room for the Fed to make another move

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had many crying that the Fed is making the US economy into Japanification, slow growth with repeated recessionary episodes and frequent securities buyouts.

Chart – Fed rate moves, 2003-2020 Source: CNBC, The Fed

In contrast, whilst dealing with the economic impact of COVID-19, South Korea government put more focus on the most vulnerable sectors, that is SME and self-employed people serving outdoor markets, that is in paying wages and child care subsidies. Medical institutions and quarantine efforts in the health system is also another hands-on priority. None of it is related with the interest rate cut.

Quantitative Easing The trickery IOU system has been implemented more vastly since 2008. The mechanisms justify the central banks to exchange any securities issued by any parties to raise fund with a repo letter. The parties are legal subjects such as Treasury and other government agencies. A large proportion of the newly printed money is kept as excess reserves with the Fed. Table – Fed’s QEs when dealing with 2008 SPM Crisis QE Type Period $ bn Financial Instruments QE1 2008-11/2009-03 100 agency debt 500 MBS (of Fannie Mae, Freddie Mac, Ginnie Mae) 2009-03/2010-03 750 MBS QE2 2010-11/2011-06 600 long-term T-bonds in total, or $75b monthly OT 2011-09/2012-06 400 buys T-bonds with maturities of 72-360 months; 2012-07/2012-12 267 sells treasuries with maturities of 3-36 months QE3 2012-09/2012-12 40 MBS a month from FRB members QE4 2013-01/2014-10 85 T-bonds a month. Reduced by $10b from June 2013 to Feb. 2014

Starting 23 March 2020, the debt securities issuers includes all levels of governments, from states to local and municipal, and corporates. The usual justified claim is to keep the markets functioning and operating smoothly. The institutional debtors are saved and bailed out from the financial burdens. But not the vulnerable groups such as SMEs and self-employed people closing businesses and lay off employees and create mass bankruptcies in persons and companies. This all-in Fed’s last move is seen as an infinite, unlimited quantitative easing. Existing bonds in the market will be acquired by the Fed thru ETFs tracking corporate bonds. Investment grade and less

Fed's 2020 Quantitative Easing Debunked

than 5y to mature are the ultimate buying criteria. Six month grace period is given to new bonds issued by high grade corporations (PMCCF). Bridge financing for up to 4y is given to large employers. Strings attached (B4 loans) are the money is not to be spent for share buybacks and dividends. Another criteria is to retain 90% of employees. Executive compensation is also limited. This Fedâ&#x20AC;&#x2122;s move surely distorts risk premia in markets. It discourages lower quality borrowers from refinancing their maturing debts in the form of commercial paper and corporate bonds. The move also suppresses long-dated Treasury yields and broader market volatility. Once considered temporary measure in 2008, it has become business as usual ever since. The unlimited QE began when the Fed stated intentionally that no cap and no time limit applies when dealing with the purchase of treasuries and MBS. Up to 20 March 2020, half of $500b treasuries and a third of $200b agency MBS were completed in 5 days, viz as per the Fed slashed the interest rate to 0%.

The Exploited Solutions and Curing Band-Aids The ineffective monetary policies of the Fed is due to the mis-allocation of the fund. Instead of handing cash-equivalent to the needing individuals, workers, first responders, the Fed loves to distribute trillions of USD to fiat junkies fiending, Fed's collegial financial & lobbying communities, by keeping and/or with the exchange of debt recognition letters or debt instruments by any name. Table â&#x20AC;&#x201C; QE1-QE2 Participants: Largest 14, excluding CBLS Participant Name US$ bn % Citigroup 2,654.0 13.6 Merrill Lynch 2,429.4 12.4 Morgan Stanley 2,274.3 11.6 AIG 1,046.7 5.4 Barclays (UK) 1,030.1 5.3 Bank of America 1,017.7 5.2 BNP Paribas (Fr) 1,002.2 5.1 Goldman Sachs 995.2 5.1 Bear Stearns 975.5 5.0 Credit Suisse (ch) 772.8 4.0 Deutsche Bank (de) 711.0 3.6 RBS (UK) 628.4 3.2 JP Morgan Chase 456.9 2.3 UBS (ch) 425.5 2.2 All others 3,139.3 16.1 Total 19,559.0 100.0 Source: Pelkerson (2011)

The boondoggling lobbyists backed up by opportunistic companies seeking bailout funds, a very huge sums of money up for grabs, have these things in mind: 1. jonesing like drug addicts for fiat. 2. relentlessly circling like sharks and vultures. 3. taking advantages of the wide opening chances and big opportunity. 4. exploiting and securing the cushions of well-connected wealthiests. 5. carving out tax goodies, tax breaks on any corporate actions creating massive capital gains. 6. acting out as a group representation of distressed victims, casualties of widespreading chinese virus infections, but full of selfishness, greedy, and klepto mentality.

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The Blunt and Dull Move The Fed is making a blunt and dull move in the monetary policy by acting as the sole financier throwing money to: 1. the zombie companies. 2. airlines companies having enormous free cash flow. The real problem is in the real economy. The covid-19 has invisible hands locking down people to stop moving, worldwide. As a result, goods and services are not available to be manufactured, delivered, and consumed. Ghost towns spreading out to any inhabited and populated areas. Economic activities all over the world are heading to a full stop. No production. No distribution. No consumption. To flatten the curve of widespreading the pandemic chinese virus, public places, crowds, and mass gatherings have been forbidden, whilst social distancing, self-isolation and -quarantine have been encouraged, worldwide. As of this writing, 24 March, the confirmed cases of infectious chinese virus are more than 375k. As of 1 April, 7:58, Jakarta time, the confirmed cases were blown to more than twice, ie to the level of 857k, whereas 136 deaths were identified in Indonesia. As of 15 April, 04.00 UTC, the confirmed cases doubled to 2m, whilst unconfirmed cases are believed to be far higher. In the meantime, as per 16 March, Urumqi in Xinjiang became the first and biggest concentration of cinema-goers. About 500 movie theatres were open, with the re-release of older local titles. On 25 March, the lockdown of Hubei province was lifted. Hundreds of cars were sighted to enter Wuhan’s province

The Fed Dispensed $29t Bailout Funds in 2008 SPM Crisis In 4 years, starting from December 2007 to November 2011, the Fed had thrown about $29t to rescue the financial markets in the US and the world. The staggering amount came from Pelkerson’s study while combing the Fed’s data of QE1 and QE2. It does not include 2 other QEs and 1 OT that the Fed had implemented to tackle the 2008 SPM crisis. Pelkerson lacked to mention the very real important matters such as the profile of primary dealers and state-owned mortgage companies. Table – Facilities provided by the Fed and recapitulated by Pelkerson, Dec. 2007 – Nov. 2011 Facility Cumulative Outstanding Name Begin End % $ bn $ bn TAF 2007-12-20 2010-03-11 12.89 3,818.41 CBLS 2007-12 2010-02 33.96 10,057.40 -1.96 ST OMO 2008-03-07 2008-12-30 2.89 855.00 TSLF 2008-03-11 6.77 2,005.70 BS BL 2008-03-14 2008-03-17 0.04 12.90 ML I 2008-03-16 0.10 28.82 -12.98 PDCF 2008-03-16 2010-02-01 30.22 8,950.99 AIG RCL 2008-09-16 0.47 140.32 AIG SBF 2.71 802.32 AIG ML-II 0.07 19.50 -9.34 AIG ML-III 0.08 24.30 -18.05 AIG AIA/ALICO 2009-12-01 2010-09-30 0.08 25.00 AMLF 2008-09-19 2010-02-01 0.73 217.44 CPFF 2008-10-07 2010-02-01 2.49 737.07 TALF 2008-11-25 2010-06-30 0.24 71.09 -10.57 Agency MBS 6.25 1,850.14 -849.26 Total 100.00 29,616.39 -42.325 Source: Pelkerson (2011), enriched

Monthly Peak as of 2009-01 2008-10 7, 9, 12 of 2008 2008-09-w2

$ bn 347 2,887 100 110.85

Outstanding Peak as of $ bn 2009-03 493 2008-12 583 2008-04-30 80 2008-10-w1 236

2008-09-26

728.64 2008-09-26

147

2008-09-25 2008-10-07 2009-06-04 2009-04-12

89 114.59 10.72 80.5

152 348 48 1,129

2008-10-02 2009-01-22 2010-03-18 2010-06-23

Fed's 2020 Quantitative Easing Debunked

Liquidity Transmission The 2008 SPM crisis was resolved by the Fed through 4 QEs and 1 OT. The tapped liquidity funds ran down from the spigots operated by the primary dealers. The liquidity amount gets transformed and reduced according to the chosen transmission channels. From reserves in the central bank to liquidity facilities operated by the primary dealers, the funneled funds are recorded as assets, deposits, and/or credits by the recipient banks, other financial institutions, and/or companies based on the TBTF criteria, which is subjective and preferentials. Yet, the liquidity conversion rate does not stop at the primary dealers, but is being practiced as well along by the recipient banks. They are required to maintain liquidity coverage ratio (LCR), instead of the usual and obsolete reserve requirements. Above all, the most important financial figures and ratios that matter are the earnings power, profitability variables, cost and benefit, LDR, etc. The financial instruments kept may vary from physical currencies, precious metals, to highly liquid assets. Money multiplication began when the banks begin to disburse loans to customers and consumers. Just like the banks receiving liquidity facilities, both customers and consumers do not spend directly and in a full amount. Some level of retention is applied. Some cash flow management and techniques may be applied and implemented. The additional and real money supply gets reduced accordingly.

Chart â&#x20AC;&#x201C; The Routes of Quantitative Easing Source: Durden (2012)

Monetary inflation may actualise and get worse when more money is required to spend to an exchange of lesser goods and services. The more valueless of a currency, the more speed and velocity of money to move. In simple words, easy money makes borrowing becomes cheap. Lower interest rates mean lower interest incomes and lower yields, but risk-free. Borrowers of cheap money tend to flock to higher rewarding assets, which is characterised by higher risk of defaults and losses.

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Chart â&#x20AC;&#x201C; QE in Germany Source: Deutsche Bundesbank (2016) Note: The blue fields denote the central bankâ&#x20AC;&#x2122;s active intervention in the transmission process.

Emerging markets, along with the available financial instruments, have become a new promised land of profits. Coupled with higher interest rates is a higher level of risk. Higher apppetite for risks is mostly and usually fueled by greedy behaviours and preferences. To increase their money power, the borrowers get to hedge and secure its finance by increasing securitisations and collateralised lending activities. Just like a taxi meter, every minute counts. It means that they are on a short-leash.

Quantitative Easing: The Mechanics

Chart â&#x20AC;&#x201C; QE transmission Source: Joyce, Tong, Woods (2011)

Fed's 2020 Quantitative Easing Debunked

Chart â&#x20AC;&#x201C; QE Effects in Japan: Conceptual Diagram Source: Ugai (2007)

Hot money pours and strengthens emerging market economies, likewise their currencies. The chain reaction is as follows: 1. The flooded US dollar depreciates its value against local currencies (FX route, effect). 2. Lesser local money means more to impor (FX route, effect). 3. More money to spend (monetarism route, money supply effect) (wealth effect). 4. Cheaper money (lesser expense) to borrow (interest rate route, Keynesian marginal efficiency of investment analysis). 5. More money chasing higher returns, high rewarding assets, higher risks (portfolio route). 6. Lower interest expense means lower interest income (yield) received by the bondholder, whereas yield is the opposite of bond price. In bond, interest rate is called by coupon rate. Higher priced capital asset (bonds held) means higher collateral value (collateral value route). The definition of emerging market economies is not confined to the physical markets, but through their wide open financial markets. FX market is an open public place for everyone (having computer, internet, and money) to participate as a player. From individuals, to banks and other financial institutions, money managers, hedge funds, MNCs, and central banks. Money managers can function as investment managers, portfolio managers, or pooled funds operators.

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The Elusive Goals Economic growth, low unemployment rate, price stability have been the keywords being touted as the goals of any monetary policies and fiscal policies as well. The downsides the authorities to evade, and fail, are escalation of the current (financial) crisis to economic malaise, recession and depression. The upsides the authorities to reach, and success, are the functioning financial markets, lesser strains and stresses on liquidity, broader market confidence restored and bolstered.

Chart â&#x20AC;&#x201C; Economic stimulation through QE Source: Ryan-Collins et al (2013) Note: APF: Asset Purchase Facility. GIB: Gulf International Bank. BIB: British Investment Bank.

Liquidity has been touted as the cure for all when there is something wrong with the economy, either high unemployment, economic growth rates are lower than expected, or inflation is too low. The path and road from higher liquidity condition, indicated by higher reserves loaned to money supply and stimulate the economic activities that cause some inflation, has never been clear. Too many variables, constraints, and intervening factors that may not go well and as expected. Economic growth should have been sustainable, maximum (employment), beneficial to everyone. By lowering interest rate (federal funds rate target), the FOMC intends to foster economic growth, to boost and spur consumer spending and business investment.

QE Impacts QEâ&#x20AC;&#x2122;s effects on real economic performance have never been direct and in a straight line. Time lag and too many variables in between are the two major determining components. Central banksâ&#x20AC;&#x2122; move surely distorts the financial markets to function freely. Markets get separated and segmented. The interest rates of the financial instruments intended and targeted by OMO vary and differ with other financial instruments. In other words, QE effects on equities, FX, and commodity prices are less uniform.

Fed's 2020 Quantitative Easing Debunked

Chart – Qualitative economic impact of QE Source: Joyce, Tong, Woods (2011)

Chart – Economic impacts of QE Source: Ryan-Collins et al (2013) Note: Gilt is UK Treasury Bond.

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Many have studied the relevance and effectiveness of QE policies. Yet, they mostly lack of details of the preferences and terms of execution of bond buying. The buying binge is not random. The tinkering in the deals is private. From origination to refinancing, selection and execution, it is done by a handful of select individuals. NDA is stressed out and practiced at every moment. The timing, the size, the target, the packaged deals are not for public consumption, but when the deals are closed.

QE Unintended Consequences Nevertheless, many have agreed that QE policy is a quick fix, highly effective, painkillers, provides an instant relief, but not a long-term solution. When QE policy is no longer implemented, the liquidity spigot stops pouring easy money. When no more pump-priming exist, money becomes tight. Interest rates begin to climb. The main pillar and a sole assumption to the successful of QE begins to crumble. Banks start to call in the loans. Businesses start contracting. Recession ensues. The negative chain reaction begins when usual and habitual monetary stimulus disappears. Once the liquidity stimulus stops pouring, people start pulling their money out of the markets, causing the asset prices to crash. This is the dark side of QE, a sudden crash in the market prices. When the interest rates begin to climb, the QE taper begins. The easy money starts flowing back into the US, leaving many emerging economies in trouble. Any initiative, intention, or move to taper off the QE, the markets get spooks. Letâ&#x20AC;&#x2122;s begin with the analogue of a QE policy. When money supply is larger than demand, the interest rates fall. Vice versa. When money demand is larger than supply, the interest rates rise. Lower interest rate means lower interest expense. Lower borrowing cost enables businesses to expand, adding more jobs and lesser unemployment. Lower borrowing cost can also mean higher demand for asset purchase such as stocks, bonds, properties. When demand exceeds supply, the asset prices inflate and create bubble. It can also further mean that the large scale asset purchase (LSAP) absorbs and eliminates toxic assets from the market. Banks can get rid of toxic assets and dump it to the central banks easily. As another easy money policy, QE creates and opens a chance of free riding, double standard, reckless and irresponsible behaviours, and moral hazard of borrowers, recipients, and beneficiaries of QE. Individuals get a penny or a dime, wealthy oligarchs get billions. What an injustice. The central banks and the governments negatively reinforce bad behaviours by leaving the source of financial mayhem unpunished. In normal times, savers get lesser interest rates, borrowers pay higher interest rate. This low cost of fund is multiplied by the low interest rates provided by the central bank through its benchmark rate, which has been kept low and minimum. QE and LSAP just multiply the inflation of asset prices to bubble. The QE policy implemented in the US, UK, Japan, and eurozone affects the emerging economies with the flooding dollar influx. It appreciates local currencies and add more purchasing power and capabilities to import more. Some money influx are allocated as investments to make goods with export quality to add more dollars incoming. The increasing international trade in dollar terms add more value to the dollar as more demand to pay import bills and receive export revenues.

Fed's 2020 Quantitative Easing Debunked

Central Bank vs The Market Every writing is siding. Opponents and proponents. Many loves to skip the critical details and devour anything presented in the media toolkit without hesitant and clear thinking and insights. The onesided perspective only presents what’s beneficial and advantageous for themselves, and put a shuteye on other things. Some loves to mix water and oil whilst making narrow-minded analyses. Instead of providing straight line point of views, many have blurred the boundaries between the head and the tail. Causalities of the causes and of the effects have been intermingled, creating tangled threads, by intention or not, or just lack of creative thinkings as the outsider of the box and taking a role as a problem solver.

Chart – The interactivity of central banks and the financial markets Source: Toloui (2019).

Some analysts can’t separate between readily available quantitative data, which is periodic, objective, measurable, against qualitative data, which is subjective, inferential, and mostly binary. Confidence, policy signalling, portfolio rebalancing are 3 of many variables which is subjective and inferential. The worst part is where the analysts fail to provide the analytical framework with a simple chart, splitting and defining which one is the cause and which one is the effect and the intervening variables that may occur intermittently, periodically or not, with a trigger or not, event-led or not. The circulating asymmetric information creates mixed signals which may be interpreted, perceived, and sensed differently with market participants having different agenda and their own vested interests. Some steal the headstarts with the intention to grab financial assets with lower rates than ever by making moves against the intention of policy signals. Once the market heads to the intended lows, the prime movers, the primary dealers, the prime brokers buy the assets at large, taking a long game. They may and can cash it in between whenever the time and the moments present and kick in. In the meantime, central banks’ role and switch is between validate or shock the market expectations. Whilst market participants’ role is to switch between digest and following through or anticipate. The choices are between psychological against fundamental and psychological against behavioural.

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The $6.6t FX Turnover and The $9t Payments Risk, Daily In April 2019, daily trading in FX markets reached an amount of $6.6t which is coupled with a huge payments risk up to $8.9t, daily. FX settlement risk is huge as it can destabilise financial systems and freeze international payment system. The bankruptcy of Bankhaus Herstatt was caused by its failure to settle USD payment for DM on 26 June 1974. Table – OTC FX turnover, net-net basis,1 daily averages, 2004-2019 (US$ bn) Instrument 2004 2007 2010 2013 2016 2019 Foreign exchange instruments 1,934 3,324 3,973 5,357 5,066 6,590 Spot transactions 631 1,005 1,489 2,047 1,652 1,987 Outright forwards 209 362 475 679 700 999 Foreign exchange swaps 954 1,714 1,759 2,240 2,378 3,202 Currency swaps 21 31 43 54 82 108 Options and other products2 119 212 207 337 254 294 Memo: Turnover at April 2019 exchange rates 3 1,854 3,071 3,602 4,827 4,958 6,590 Exchange-traded derivatives4 25 77 144 145 115 127 Source: BIS, Foreign exchange turnover in April 2019, Triennial Central Bank Survey, 16 Sept. 2019 Notes: 1 Adjusted for local and cross-border inter-dealer double-counting (ie “net-net” basis). 2 The category “other FX products” covers highly leveraged transactions and /or trades whose notional amount is variable and where a decomposition into individual plain vanilla components was impractical or impossible. 3 Non-US dollar legs of foreign currency transactions were converted into original currency amounts at average exchange rates for April of each survey year and then reconverted into US dollar amounts at average April 2019 exchange rates. 4 Sources: Euromoney Tradedata; Futures Industry Association; The Options Clearing Corporation; BIS derivatives statistics. Foreign exchange futures and options traded worldwide.

Table – FX trading activity and payments, April 2019 (US$ bn) Trading activity Trades/payments A. Spot 1,987 B. Deliverable forwards 741 C. FX and currency swaps 3,311 D. NDFs and options1 556 E. Total (= A + B + C + D) 6,595 Settlement F. Gross payment obligations (= 2 x (A + B) + 4 x C) 18,701 G. Bilateral netting2 -3,516 H. Net payment obligations (F - G) 15,185 I. Of which: settled with PvP3 6,311 J. Of which: settled without PvP protection4 8,874 Source: Bech and Holden (2019). Notes: 1 NDFs and some options are settled with a single payment and are therefore not subject to FX settlement risk. 2 Bilateral netting reduces the amount of payment obligations to be settled; it is calculated by applying the proportion of netting shown in the Triennial Survey. 3 Calculated using the CLS settlement data for April 2019 and the "Other PvP" proportion in the Triennial Survey. 4 "Without PVP protection" is the residual.

In 2002, Continuous Linked Settlement (CLS) emerged as an institution provides FX transactions settlement with a payment-versus-payment (PvP) system. PvP eliminates FX settlement risk by ensuring that a payment in a currency occurs if and only if the payment in the other currency takes place. The resilient FX markets are challenged as the risk appears to have increased since 2013. Different FX instruments give rise to different numbers of payments. For example, spot and outright forwards result in 2 payment obligations, whereas swaps result in 4 payments of principal (2 at

Fed's 2020 Quantitative Easing Debunked

inception and 2 at repayment). FX trades can also be bilaterally netted, which eliminates a need for settlement. Some FX transactions, such as non-deliverable forwards (NDFs), are settled with a single payment and are therefore not subject to FX settlement risk. NDFs are forward contracts that do not involve an actual exchange of currencies. Instead, they entail a settlement of the difference between the actual and a pre-agreed exchange rate in a single USD payment at maturity. One reason for the relative decline in PvP protection is the growth of trading in currencies not eligible for CLS settlement. In absolute terms, 90% of FX settlement risk is in the top 10 jurisdictions. However, these advanced economies settle a higher proportion of their FX with PvP protection than emerging market economies (EMEs) do, many of which have currencies that are not included in CLS. Nonetheless, CLS-eligible currency pairs still make up about 80% of total global trading activity. To reduce global risk, it may therefore be necessary to both encourage FX market participants to use PvP where available and widen that availability to include EME currencies. The task of reducing global risk is now firmly on the agenda of bank supervisors.

FX Market Structure

Chart - The interactions and inter-relations of players in the FX markets Source: King et al (2012), augmented by Schrimpf and Sushko (2019: 41) by adding LA to depict liquidity aggregators and PTFs in their roles as both clients and intermediaries. Notes: EB = electronic broker; LA = liquidity aggregator; MBP = multi-bank platform; PB = prime broker; PTF = principal trading firm; RA = retail aggregator; SBP = single-bank platform; VB = voice broker. Dashed lines indicate voice execution; solid lines indicate electronic execution.

High-frequency trading (HFT) has been mentioned as the catalyst to turn the markets upside-down in a matter of seconds. The practice is not implemented solely by the hedge funds and PTFs (proprietary trading firms). Any parties having the required resources can do the same, invest, hedge or speculate for their own account by employing high-speed algorithmic trading strategies characterised by a large

Sando Sasako Table â&#x20AC;&#x201C; OTC FX market turnover daily by instrument, currency, counterparty, execution method, country, April 2019 (US$ mn) Forwards, Swaps Options Description Total Spot Outright FX Currency FX Total, "net-net" basis1 6,595,471 1,987,441 999,318 3,202,667 108,486 297,522 by currency USD EUR JPY GBP AUD CAD CHF CNY Other currencies

5,824,036 2,129,114 1,108,495 843,698 446,511 332,053 327,022 285,030 1,894,984

1,687,179 615,509 360,221 239,765 170,020 121,791 85,683 96,896 597,818

883,119 255,673 145,256 108,735 52,827 42,963 36,237 35,600 438,227

2,905,785 1,141,653 515,729 444,190 186,332 145,739 194,094 136,851 734,959

101,895 26,012 24,054 19,071 12,077 7,168 1,961 1,564 23,170

246,058 90,267 63,234 31,937 25,254 14,392 9,047 14,120 100,736

by counterparty with reporting dealers local cross-border with other financial institutions local cross-border

2,523,140 818,039 1,705,101 3,598,511 1,838,320 1,760,191

592,902 201,631 391,271 1,235,512 708,709 526,803

267,784 84,770 183,014 615,431 308,869 306,563

1,498,371 466,790 1,031,582 1,538,516 710,449 828,067

55,952 20,688 35,265 46,599 12,800 33,799

108,131 44,161 63,970 162,453 97,493 64,960

non-reporting banks institutional investors hedge funds and PTFs official sector other undistributed with non-financial customers local cross-border Of which: prime brokered Of which: retail-driven

1,615,720 776,872 593,020 88,805 499,332 24,760 473,784 243,984 229,800 1,488,252 201,653

448,235 308,349 261,175 17,636 195,322 4,793 159,028 96,115 62,913 918,450 65,614

126,515 214,863 153,905 21,139 95,394 3,614 116,104 52,189 63,915 251,431 13,618

967,327 212,409 122,887 48,457 174,343 13,093 165,780 77,307 88,473 217,531 96,824

21,531 8,360 11,463 640 3,850 755 5,935 2,657 3,278 395 192

52,112 32,892 43,590 933 30,422 2,504 26,938 15,716 11,222 100,445 25,405

by execution method Voice direct Voice indirect Electronic direct Electronic indirect Undistributed

1,807,326 864,775 1,826,028 1,892,470 204,873

497,679 51,053 630,267 745,142 63,301

310,450 71,669 288,707 280,260 48,233

781,351 682,074 832,032 829,696 77,514

68,559 14,939 13,575 7,528 3,886

149,250 45,040 61,447 29,845 11,939

Total, "net-gross" basis2

8,300,586

2,378,712

1,182,332

4,234,248

143,751

361,493

by country United Kingdom 3,576,409 1,143,755 541,629 1,645,696 78,001 167,328 United States 1,370,119 475,773 246,079 579,155 6,550 62,562 Singapore 639,869 153,862 98,318 335,724 7,063 44,890 Hong Kong SAR 632,108 111,701 58,619 417,161 21,686 22,934 Japan 375,505 97,614 61,133 195,279 6,049 15,421 Switzerland 275,719 64,203 29,941 161,148 36 20,389 France 167,123 22,866 19,752 117,885 2,513 4,083 China 136,017 43,302 5,466 84,347 344 2,557 Germany 124,448 18,916 6,982 95,725 1,157 1,668 Other countries 1,003,271 246,719 114,412 602,128 20,351 19,661 Source: BIS, Triennial Central Bank Survey 2019, Global FX Market Turnover in 2019, 8 Dec. 2019 Notes: 1 Adjusted for local and cross-border inter-dealer double-counting. 2 Adjusted for local inter-dealer double-counting. This corresponds to the total on a "net-net" basis plus local reporting dealers.

Fed's 2020 Quantitative Easing Debunked

number of trades, frequent, and very short holding periods. Nevertheless, electronic executions only accounted 56.4% of the FX daily turnover, voice executions by 40.5%, and the remaining 3.1% were undistributed. The FX market turnover also reveals its structure by instruments, currencies traded, counterparties, execution methods, and the countries. The complexity and fragmented market structure of these interdealer markets can be easily comprehended when the interactions and inter-relations of players are mapped into the following chart. Investment funds and other types of money managers, including commodity trading advisers (CTAs), share (a combination of) the following characteristics: 1. they often follow a relatively broad range of investment strategies that are not subject to borrowing and leverage restrictions, with many of them using high levels of leverage; 2. they often have a different regulatory mandate than “institutional investors” and typically cater to sophisticated investors such as high net worth individuals or institutions; and 3. they often hold long and short positions in various markets, asset classes and instruments, with frequent use of derivatives for speculative purposes.

Prime Brokers Table – Largest Prime Brokers by the managed fund size of Hedge Funds, ranked, May 2018 US$ mn < 50 50 - 99 100 - 249 250 - 499 500 - 999 Barclays 10 9 BNP-P Prime Brokerage 9 10 9 BoAML 8 6 5 8 7 Citi Prime Finance 7 8 CS Prime Fund Services 6 5 6 4 5 DB Global Prime Finance 7 7 7 6 6 Fidelity Prime Services 10 GS 1 2 2 2 1 HSBC Prime Services Interactive Brokers 2 10 Jefferies 9 8 9 JPM 4 3 3 3 3 MS Prime Brokerage 3 1 1 1 2 Nomura Prime Services Peregrine Securities Pershing Prime Services Rand Merchant Bank SG Americas Securities SG Prime Services UBS Prime Services 5 4 4 5 4 WF Prime Services 10 8 Source: Preqin, Hedge Fund Prime Brokers, May 2018

> 1000 8 10 6 7 4 5 1

2 3

Prime broker can be a service, division, or a subsidiary of an investment bank. Prime broker functions as a central broker managing extensive and complex trading of various financial instruments. The functions vary from facilitating, to coordinating, acting as a custodial and a regular investment bank. As a custodial, prime broker knows which institutional investors taking a long position on equities. Prime broker can lend the equities to hedge funds for short-selling purposes. Margin financing come from commercial banks. Trade clearing and settlement capabilities are the other core functions of a prime broker.

Sando Sasako

Chart â&#x20AC;&#x201C; The relationships of prime broker and hedge funds Source: Kenny and Mallaburn (2017).

Table â&#x20AC;&#x201C; Prime Broker, ranked by global revenues, 20132016 Source: Griffiths and Kinnaird (2017).

Fed's 2020 Quantitative Easing Debunked

Abbreviations ABCP Agency MBS AIG AIA/ALICO AIG ML-II AIG ML-III AIG RCL AIG SBF AMLF APF APP BOE BOJ BS BL CBLS CBPP CFI CPFF CPFF ECB ETFs FOMC FRFA FROs GDP GSE GSFF JGBs J-REITs LSAP LTROs MBS ML I MMMF MROs OIS OMTs PDCF QE SBLF SFSOs SMP ST OMO TAF TALF TSLF ZIRP

Asset-Backed Commercial Paper Agency Mortgage-Backed Security Purchase Program AIG, AIA/ALICO AIG, Maiden Lane II AIG, Maiden Lane III AIG, Revolving Credit Facility AIG, Securities Borrowing Facility Asset-Backed CP MMLF Asset Purchase Facility Asset Purchase Program Bank of England Bank of Japan Bear Stearns, Bridge Loan Central Bank Liquidity Swaps covered bond purchase program corporate finance instruments CP Funding Facility Commercial Paper Funding Facility European Central Bank exchange-traded funds Federal Open Market Committee fixed-rate, full-allotment fixed-rate operations gross domestic product government-sponsored enterprise Growth-Supporting Funding Facility Japanese government bonds Japanese real estate investment trusts large-scale asset purchase longer-term refinancing operations mortgage-backed securities Bear Stearns, Maiden Lane I money market mutual fund main refinancing operations overnight indexed swap outright monetary transactions Primary Dealer Credit Facility quantitative easing Stimulating Bank Lending Facility special-funds-supplying operations Securities Markets Programme Single Tranche Open Market Operation Term Auction Facility Term Asset-Backed Securities Loan Facility Terms Securities Lending Facility and Term Options Program zero interest rate policy

Sando Sasako

References Andreas Schrimpf and Vladyslav Sushko, FX trade execution: complex and highly fragmented, BIS Quarterly Review, Dec. 2019, p.48-49. Andrew Walker, Has quantitative easing worked in the US?, 20141030, https://www.bbc.com/news/business-29778331 Basel Committee on Banking Supervision, "Basel Committee discusses policy and supervisory initiatives and approves implementation reports", press release, October 2019. Ben Casselman, Whatever It Takes: How the Fed Aims to Rescue the Economy, nytimes, 20200323, https://www.nytimes.com/2020/03/23/business/economy/federal-reserve-how-rescue.html Claire Jones, Why the dollar crunch is (mostly) a rich world problem, 20200324, https://ftalphaville.ft.com/2020/03/24/1585041854000/Why-the-dollar-crunch-is--mostly--arich-world-problem/ CNN Staff, What's in the $2 trillion coronavirus stimulus bill, 20200326, https://edition.cnn.com/2020/03/25/politics/stimulus-package-details-coronavirus/index.html Committee on Payment and Settlement Systems, "Settlement risk in foreign exchange transactions", CPMI Papers, no 17, March 1996. Cynthia Kim, South Korea unveils $9.8 billion stimulus to fight coronavirus, 20200304, https://www.reuters.com/article/us-southkorea-economy-budget/south-korea-unveils-98billion-stimulus-to-fight-coronavirus-idUSKBN20R046 Deutsche Bundesbank, Monthly Report, Vol.68, No.6, June 2016. Frank Kenny and David Mallaburn, Hedge funds and their prime brokers: developments since the financial crisis, BOE Quarterly Bulletin, 2017 Q4 FRB, Agencies provide additional information to encourage financial institutions to work with borrowers affected by COVID-19, Joint Press Release, 20200322, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200322a.htm FRB, Federal Reserve announces extensive new measures to support the economy, 20200323, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm G Galati, "Settlement risk in foreign exchange markets and CLS Bank", BIS Quarterly Review, December 2002, pp 55-65. Hiroshi Ugai, Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses, Monetary and Economic Studies, March 2007. Institute of International Finance, U.S. Fiscal and Monetary Responses to COVID-19, 20200326. James Politi, Brendan Greeley, Colby Smith, and Joe Rennison, Federal Reserve unleashes unlimited Treasury purchase plan, 20200324, https://www.ft.com/content/b71f0c32-6cfb-11ea-89df41bea055720b Jamie Redman, The Multi Trillion-Dollar Stimulus Package: These Are the US Corporations Begging for Bailouts, bitcoin.com, 20200323, https://news.bitcoin.com/the-multi-trillion-dollarstimulus-package/ Jennifer S. Zucker, Shomari B. Wade, Barbara A. Jones, Peter H. Lieberman, Michael J. Schaengold, Scott A. Schipma, Brittany E. Allison, Danielle K. Muenzfeld, Congress Passes CARES Act: Overview of the Relief Available to Small Business Concerns, 20200327, https://www.gtlaw.com/en/insights/2020/3/congress-passes-cares-act-overview-of-the-reliefavailable-to-small-business-concerns Josh Ryan-Collins, Richard Werner, Tony Greenham, and Giovanni Bernardo, Strategic quantitative easing: Stimulating investment to rebalance the economy, New Economics Foundation, London, July 2013. Jim Bianco, The Fedâ&#x20AC;&#x2122;s Cure Risks Being Worse Than the Disease, 20200328, https://www.washingtonpost.com/business/on-small-business/the-feds-cure-risks-being-worsethan-the-disease/2020/03/27/56357a52-7023-11ea-a156-0048b62cdb51_story.html Katie Lobosco and Tami Luhby, Senate stimulus deal includes individual checks -- but don't expect the money right away, 20200326, https://edition.cnn.com/2020/03/25/politics/senate-dealstimulus-checks-coronavirus/index.html Lakshman Achuthan and Anirvan Banerji, The Fed's emergency rate cut was a big mistake, 20200305, https://edition.cnn.com/2020/03/06/perspectives/fed-rates-recession/index.html

Fed's 2020 Quantitative Easing Debunked

Lakshman Achuthan and Anirvan Banerji, The Fed's latest rate cut was a useless and desperate move, 20200318, https://edition.cnn.com/2020/03/17/perspectives/fed-interest-rate-cut-coronaviruseconomy/index.html Lowell R. Ricketts, Quantitative Easing Explained, Liber8, Economic Information Newsletter, Research Library – FRB St Louis, April 2011. Michael Joyce, Matthew Tong, and Robert Woods, The United Kingdom’s quantitative easing policy: design, operation and impact, Quarterly Bulletin, 2011 Q3. Michael Mackenzie, The Federal Reserve has gone well past the point of ‘QE infinity’, 20200324, https://www.ft.com/content/11b338a2-6d0c-11ea-89df-41bea055720b Morten Bech and Henry Holden, FX settlement risk remains significant; in Andreas Schrimpf and Vladyslav Sushko, FX trade execution: complex and highly fragmented, BIS Quarterly Review, Dec. 2019, p.48-49. Nancy Tartaglione, China Re-Opens 500+ Cinemas As Coronavirus Cases Ease, Moviegoing Slight, 20200323, https://deadline.com/2020/03/china-movie-theaters-open-500-international-boxoffice-1202890025/ Neil Irwin, The Fed’s Message: The Money-Printing Presses Are Fired Up and Ready to Go, 20200323, https://www.nytimes.com/2020/03/23/upshot/coronavirus-fed-extraordinary-response.html nytimes.com, Worldwide Confirmed Coronavirus Cases Top 2 Million, 20200415, https://www.nytimes.com/2020/04/15/world/coronavirus-cases-world.html Ramin Toloui, How Did Quantitative Easing Really Work? A New Methodology for Measuring the Fed’s Impact on Financial Markets, Stanford Institute for Economic Policy Research, SIEPR Working Paper No.19-032, Nov. 2019. Rohit Arora, $2.2 Trillion CARES Act Provides A Lifeline To Small Businesses, 20200327, https://www.forbes.com/sites/rohitarora/2020/03/27/22-trillion-cares-act-provides-a-lifeline-tosmall-businesses/#4896be660cf3 Thomas Wade, Timeline: The Federal Reserve Responds to the Threat of Coronavirus, 20200318, https://www.americanactionforum.org/insight/timeline-the-federal-reserve-responds-to-thethreat-of-coronavirus/ Tony Griffiths and Stuart M. Kinnaird, Prime Broker Pressures, Identifying and alleviating the tensions in the manager-prime relationship, HFM Insights, Sept. 2017 Trefis Team and Great Speculations, Quantitative Easing In Focus: The U.S. Experience, 20151116, https://www.forbes.com/sites/greatspeculations/2015/11/16/quantitative-easing-in-focus-the-us-experience/#3e4df996528d Tyler Durden, Does QE Really Work? The Evidence To Date, 20120715, https://www.zerohedge.com/news/does-qe-really-work-evidence-date Victor Ferreira, Even unlimited quantitative easing from the Fed can't buoy markets, 20200323, https://business.financialpost.com/investing/even-unlimited-quantitative-easing-from-the-fedcant-buoy-markets

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Home > News & Events > Press Releases

Press Release March 23 , 2020

Federal Reserve announces extensive new measures to support the economy For release at 8:00 a .m. EOT Share

The Federal Reserve is committed to using its full range of tools to support households , businesses , and the U. S . economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation 's first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become dear that our economy will face severe disruptions .. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate. The Federal Reserve 's rote is guided by its mandate from Congress to promote maximum employment and stable prices , along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses. These actions include :

Related Content Primary Market Corporate Credit Facitity Secondary Market Corporate Credit Facility

Term Asset-Backed Securities Loan Facility

Money Market Mutual Fund Liquidity Facility Commercial Paper Funding Facility

• Support for critical market functioning. The Federal Open Market Committee (FOMC) wilt

•

purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to bloader financial conditions and the economy. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, the FOMC will include purchases of agency commercial mortgage- backed securities In its agency mortgage -backed security purchases. Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $ 300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $ 30 billion in equity 1o these facilities. Establishment of two facilities to support credit to large employers - the Primary Market Corporate Credit Facility (PMCCF) tor new bond and loan issuance and the Secondary' Market Corporate Credit Facility ( SMCCF) to provide liquidity for outstanding corporate bonds. Establishment of a third facility, the Term Asset- Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS ) backed by student loans , auto loans, credit card loans , loans guaranteed by the Small Business Administration ( SBA) , and certain other assets . Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities , including municipal variable rate demand notes (VRDNs) and bank certificates of deposit. Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high -quality, tax -exempt commercial paper as eligible securities in addition, the pricing of the facility has been reduced. ,

In addition to the steps above , the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses , complementing efforts by the SBA. The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve' s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV. The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U. S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility. Under the TALF, the Federal Reserve wifi lend or a non-recourse basis to holders of certain AAArated ABS backed Py newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS . Treasury', using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility. The TALF, PMCCF and SMCCF are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary. These actions augment the measures taken by the Federal Reserve over the past week to support the flow of credit to households and businesses. These include : The eslablisbmert of fhe CPFF, the MMLF, and the Primary Dealer Credit Facility; The expansion of central bank liquidity swap lines : Steps to enhance the availability and ease terms for borrowing at the discount window ; The elimination of reserve requirements; Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so: • Statements encouraging the use of daylight credit at the Federal Reserve .

• • • • •

Taken together, these actions will provide support to a wide range of markets and institutions , thereby supporting the flow of credit in the economy. The Federal Reserve will continue to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. For media inquiries , call 202- 452-2955

Federal Reserve issues FOMC statement Term Sheet - Primary Market Corporate Credit Facility (PDF)

Term Sheet - Secondary Market Corporate Credit Facility (PDF) Term Sheet - Term Asset-Backed Securities Loan Facility (PDF) Term Sheet - Money Market Mutual Fund Liquidity Facility (PDF) Term Sheet - Commercial Paper Funding Facility [i

Last Update: March 23. 2020

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Primary Market Corporate Credit Facility Facility: The Primary Market Corporate Credit Facility (“Facility”) will serve as a funding backstop for corporate debt issued by eligible issuers. Under the Facility, the Federal Reserve Bank of New York (“Reserve Bank”) will commit to lend to a special purpose vehicle (“SPV”) on a recourse basis. The SPV will (i) purchase qualifying bonds directly from eligible issuers and (ii) provide loans to eligible issuers. The Reserve Bank will be secured by all the assets of the SPV. The Department of the Treasury, using the Exchange Stabilization Fund, will make an initial $10 billion equity investment in the SPV in connection with the Facility. Eligible Assets: The Facility will purchase eligible corporate bonds directly from eligible issuers and will make eligible loans to eligible issuers. Eligible corporate bonds and loans must meet each of the following criteria at the time of bond purchase or loan origination by the Facility: • • •

Issued by an eligible issuer; Issuer is rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (“NRSRO”) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and Have a maturity of four years or less.

Eligible Issuers: Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States. The scope of eligible issuers may be expanded in the future. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation. Limits per Issuer: The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020: • • • •

140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO; 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO; 120 percent for eligible assets/eligible issuers with a A/A rating from a major NRSRO; or 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO.

Interest Rate: The Facility will purchase bonds and make loans that have interest rates informed by market conditions. At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. Such interest amount will be added to, and made part of, the outstanding principal amount of the bond or loan. A borrower that makes this election may not pay dividends or make stock buybacks during the period it is not paying interest. Commitment Fee: The commitment fee will be set at 100 bps. Call Right: Bonds and loans under the Facility are callable by the eligible issuer at any time at par. Program Termination: The Facility will cease purchasing eligible corporate bonds or extending loans on September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System. The Reserve Bank will continue to fund the Facility after such date until the Facility’s underlying assets mature.

Secondary Market Corporate Credit Facility Facility: Under the Secondary Market Corporate Credit Facility (“Facility”), the Federal Reserve Bank of New York (“Reserve Bank”) will lend, on a recourse basis, to a special purpose vehicle (“SPV”) that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (“ETFs”) in the secondary market. The Reserve Bank will be secured by all the assets of the SPV. The Department of the Treasury, using the Exchange Stabilization Fund, will make an initial $10 billion equity investment in the SPV in connection with the Facility. Eligible Assets: Eligible Individual Corporate Bonds. The Facility may purchase corporate bonds that meet each of the following criteria at the time of purchase by the Facility: • •

•

Issued by an eligible issuer; Rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (“NRSRO”) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; Have a remaining maturity of five years or less.

Eligible ETFs. The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Eligible Issuers for Individual Corporate Bonds: Eligible issuers for direct purchases of individual corporate bonds on the secondary market are U.S. businesses with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation. Limits per Issuer/ETF: The maximum amount of bonds that the Facility will purchase from any eligible issuer will be capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020. The facility will not purchase more than 20 percent of the assets of any particular ETF as of March 22, 2020. Pricing: The Facility will purchase eligible corporate bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio. Program Termination: The Facility will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System. The Reserve Bank will continue to fund the Facility after such date until the Facility’s holdings either mature or are sold.

Term Asset-Backed Securities Loan Facility Facility: The TALF is a credit facility authorized under section 13(3) of the Federal Reserve Act intended to help meet the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (“ABS”) and improving the market conditions for ABS more generally. The TALF will serve as a funding backstop to facilitate the issuance of eligible ABS on or after March 23, 2020. Under the TALF, the Federal Reserve Bank of New York (“Reserve Bank”) will commit to lend to a special purpose vehicle (“SPV”) on a recourse basis. The Department of the Treasury will make an equity investment of $10 billion in the SPV in connection with the Facility, as described below. The TALF SPV initially will make up to $100 billion of loans available. The loans will have a term of three years; will be nonrecourse to the borrower; and will be fully secured by eligible ABS. Eligible Borrowers: All U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF. A U.S. company would be defined as a U.S. business entity organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank. Eligible Collateral: Eligible collateral includes U.S. dollar denominated cash (that is, not synthetic) ABS that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (“NRSROs”) and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all of the credit exposures underlying eligible ABS must have been originated by a U.S. company. Eligible ABS must be issued on or after March 23, 2020. Eligible collateral must be ABS where the underlying credit exposures are one of the following: 1) 2) 3) 4) 5) 6) 7) 8)

Auto loans and leases; Student loans; Credit card receivables (both consumer and corporate); Equipment loans; Floorplan loans; Insurance premium finance loans; Certain small business loans that are guaranteed by the Small Business Administration; or Eligible servicing advance receivables. 1

Eligible collateral will not include ABS that bear interest payments that step up or step down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS. To be eligible collateral, all or substantially all of the underlying credit exposures must be newly issued. The feasibility of adding other asset classes to the facility will be considered in the future. Collateral Valuation: The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS. This haircut schedule will be published in the detailed terms and conditions and will be roughly in line with the haircut schedule used for the TALF Facility established in 2008.

The detailed terms and conditions will further define the eligible underlying credit exposures for purposes of the TALF. The definitions are expected to be broadly consistent with the defined terms used for purposes of the TALF established in 2008.

Pricing: For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 basis points over the 2-year LIBOR swap rate for securities with a weighted average life less than two years, or 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. 2 The pricing for other eligible ABS will be set forth in the detailed terms and conditions. Fees: The SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral. Maturity: Each loan provided under this facility will have a maturity of three years. Investment by the Department of the Treasury: The Department of the Treasury, using the Exchange Stabilization Fund, will make an initial equity investment of $10 billion in the SPV. Non-Recourse: Loans made under the TALF are made without recourse to the borrower, provided the requirements of the TALF are met. Prepayment: Loans made under the TALF will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed. Program Termination: No new credit extensions will be made after September 30, 2020, unless the TALF is extended by the Board of Governors of the Federal Reserve System. Other Terms and Conditions: More detailed terms and conditions will be provided at a later date, primarily based off of the terms and conditions used for the 2008 TALF. In addition, the Federal Reserve reserves the right to review and make adjustments to these terms and conditions â&#x20AC;&#x201C; including size of program, pricing, loan maturity, collateral haircuts, and asset and borrower eligibility requirements â&#x20AC;&#x201C; consistent with the policy objectives of the TALF.

If necessary, the pricing structure would be updated to account for the expected industry transition away from LIBOR.

Money Market Mutual Fund Liquidity Facility Facility: To provide liquidity to Money Market Mutual Funds (“Funds”), the Federal Reserve Bank of Boston (“Reserve Bank”) will lend to eligible borrowers, taking as collateral certain types of assets purchased by the borrower from Funds. Timing: The Facility will open on March 23, 2020. The Facility will generally take eligible collateral that: 1) 2)

If purchased after March 23, 2020, is pledged concurrently with the borrowing; or If purchased on or after March 18, 2020, but on or before March 23, 2020, is pledged expeditiously starting on March 23, 2020.

For negotiable certificates of deposit and variable rate demand notes, a borrower may purchase these assets on or after March 23, 2020, and pledge them on or after March 25, 2020.1 Borrower Eligibility: All U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks are eligible to borrow under the Facility. Funds: A Fund must identify itself as a Prime, Single State, or Other Tax Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP. Advance Maturity: The maturity date of an advance will equal the maturity date of the eligible collateral pledged to secure the advance made under this Facility except in no case will the maturity date of an advance exceed 12 months. Eligible Collateral: Collateral that is eligible for pledge under the Facility must be one of the following types: 1) U.S. Treasuries & Fully Guaranteed Agencies; 2) Securities issued by U.S. Government Sponsored Entities; 3) Asset-backed commercial paper, unsecured commercial paper, or a negotiable certificate of deposit that is issued by a U.S. issuer,2 and that has a short-term rating at the time purchased from the Fund or pledged to the Reserve Bank in the top rating category (e.g., not lower than A1, F1, or P1, as applicable) from at least two major nationally recognized statistical rating organizations (“NRSRO”) or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; 4) U.S. municipal short-term debt (excluding variable rate demand notes) that: i. Has a maturity that does not exceed 12 months; and ii. At the time purchased from the Fund or pledged to the Reserve Bank: 1. Is rated in the top short-term rating category (e.g., rated SP1, MIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; or 2. If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO. 5) Variable rate demand note that: i. Has a demand feature that allows holders to tender the note at their option within 12 months; and ii. At the time purchased from the Fund or pledged to the Reserve Bank: The Facility will not accept negotiable certificates of deposit or variable rate demand notes until March 25, 2020. Negotiable certificates of deposit or variable rate demand notes purchased on March 23 or 24, 2020, must be pledged expeditiously starting on March 25, 2020.

A U.S. issuer is an entity organized under the laws of the United States or a political subdivision or territory thereof, or is a U.S. branch of a foreign bank.

1. Is rated in the top short-term rating category (e.g., rated SP1, VMIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; or 2. If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO. In addition, the facility may accept receivables from certain repurchase agreements. The feasibility of adding these and other asset classes to the facility will be considered in the future. Rate: Advances made under the Facility that are secured by U.S. Treasuries & Fully Guaranteed Agencies or Securities issued by U.S. Government Sponsored Entities will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made. Advances made under the Facility that are secured by U.S. municipal short-term debt, including variable rate demand notes, will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 25 bps. All other advances will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 100 bps. Fees: There are no special fees associated with the Facility. Collateral Valuation: The collateral valuation will either be amortized cost or fair value. For asset-backed commercial paper, unsecured commercial paper, negotiable certificates of deposit, and U.S. municipal shortterm debt, including variable rate demand notes, the valuation will be amortized cost. Advance Size: Each advance shall be in a principal amount equal to the value of the collateral pledged to secure the advance. Credit Protection by the Department of the Treasury: The Department of the Treasury, using the Exchange Stabilization Fund, will provide $10 billion as credit protection to the Reserve Bank. Non-Recourse: Advances made under the Facility are made without recourse to the Borrower, provided the requirements of the Facility are met. Regulatory Capital Treatment: On March 19, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the program on risk-based and leveraged capital ratios. See https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200319a1.pdf. Program Termination: No new credit extensions will be made after September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System.

Commercial Paper Funding Facility: Program Terms and Conditions Effective March 23, 2020 Facility: The CPFF will be structured as a credit facility to a special purpose vehicle (“SPV”) authorized under section 13(3) of the Federal Reserve Act. The SPV will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. The Federal Reserve Bank of New York will commit to lend to the SPV on a recourse basis. The New York Fed will be secured by all the assets of the SPV. The Department of the Treasury, using the Exchange Stabilization Fund, will make a $10 billion equity investment in the SPV. Assets of the SPV: The SPV will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed’s primary dealers. Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company. Except as provided below, the SPV will only purchase U.S. dollar-denominated commercial paper (including asset-backed commercial paper (“ABCP”) that is rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (NRSRO) or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs, in each case subject to review by the Federal Reserve. An issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is subsequently downgraded, will be able to make a one-time sale of commercial paper to the SPV so long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, in each case subject to review by the Federal Reserve. The SPV will not purchase ABCP from issuers that were inactive prior to the creation of the CPFF. An issuer will be deemed inactive if it did not issue ABCP to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020. Limits per issuer: The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit. For an issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, the maximum amount of the issuer’s commercial paper that the SPV will purchase is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded. Pricing: For commercial paper rated A1/P1/F1, pricing will be based on the then-current 3-month overnight index swap (“OIS”) rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 200 basis points.

At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own. Termination date: The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPVâ&#x20AC;&#x2122;s underlying assets mature. 1

The Board may review and make adjustments to the terms and conditions described in this term sheet. Changes will be announced on the Boardâ&#x20AC;&#x2122;s website.

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The Exchange Stabilization Fund (ESF) consists of three types of assets: U.S. dollars, foreign currencies, and Special Drawing Rights ( SDRs), which is an international reserve asset created by the International Monetary Fund.

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https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund Exchange Stabilization Fund The Exchange Stabilization Fund (ESF) consists of three types of assets: U.S. dollars, foreign currencies, and Special Drawing Rights (SDRs), which is an international reserve asset created by the International Monetary Fund. The ESF can be used to purchase or sell foreign currencies, to hold U.S. foreign exchange and Special Drawing Rights (SDR) assets, and to provide financing to foreign governments. All operations of the ESF require the explicit authorization of the Secretary of the Treasury ("the Secretary"). The Secretary is responsible for the formulation and implementation of U.S. international monetary and financial policy, including exchange market intervention policy. The ESF helps the Secretary to carry out these responsibilities. By law, the Secretary has considerable discretion in the use of ESF resources. The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s, the Act provides in part that "the Department of the Treasury has a stabilization fund â&#x20AC;ŚConsistent with the obligations of the Government in the International Monetary Fund (IMF) on orderly exchange arrangements and an orderly system of exchange rates, the Secretary â&#x20AC;Ś, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities. Relations with the Federal Reserve Legislative Basis Finances and Operations Exchange Stabilization Fund History FedPoint

https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/legislative-basis

Exchange Stabilization Fund Relations with the Federal Reserve The Secretary of the Treasury is the chief international monetary policy official of the United States. The Federal Reserve has separate legal authority to engage in foreign exchange operations. The Federal Reserve's foreign exchange operations are conducted in close and continuous consultation and cooperation with the Secretary to ensure consistency with U.S. international monetary and financial policy. The Treasury and the Fed have closely coordinated their foreign exchange operations since early 1962, when the Federal Reserve commenced such operations at the request of the Treasury. Operations are conducted through the Federal Reserve Bank of New York (FRBNY), as fiscal agent of the United States and as the operating arm of the Federal Reserve System. https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/legislative-basis

Legislative Basis Congress in the Gold Reserve Act of 1934 appropriated to the ESF $2 billion out of the increment resulting from a reduction in the weight of the gold dollar. Section 7 of the Bretton Woods Agreements Act of 1945 made the ESF's operations permanent. This Act also directed the Secretary to pay $1.8 billion from the ESF to the IMF in partial payment of the initial U.S. quota subscription in the IMF, thereby reducing the ESF's appropriated capital to the level of $200 million. An amendment to the Bretton Woods Agreements Act (passed in 1962) provided that any currencies or gold purchased by the United States from the IMF may be transferred from the Treasury General Account to the ESF and administered as part of the ESF. The ESF statute requires the Secretary to "report each year to the President and the Congress on the operation of the fund [the ESF]." As part of the annual report by the Secretary to the President and the Congress on the operations of the ESF, Treasury includes an audit report of the ESF. The audit is performed by Treasury's Office of the Inspector General. The Special Drawing Rights Act of 1968 likewise provided that any SDRs allocated by the IMF or otherwise acquired by the United States are resources of the ESF. In accordance with the Act, SDRs can be "monetized" (i.e., converted into dollars) through the issuance of Special Drawing Rights Certificates (SDRCs) by the Secretary to the Federal Reserve System in an amount not to exceed the dollar value of the ESF's SDR holdings. The dollar proceeds of such monetizations are assets of the ESF, and the SDRCs are a counterpart liability of the ESF. In 1977, the Gold Reserve Act was amended to state that no loan or credit to a foreign government or entity can be extended by the ESF for more than six months in any twelve-month period, unless the President provides a written determination to the Congress that "unique or emergency circumstances" necessitate a term greater than six months. Pursuant to this legislation and the underlying Congressional intent, Treasury has developed since the mid-1970s policy criteria to govern ESF credits, such as a requiring an assured source of repayment. Also, Treasury has often linked the availability of ESF financing to a borrower's use of the credit facilities of the IMF, both to support the IMF's role and to strengthen assurances that there will be timely repayment of ESF financing.

https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund

Exchange Stabilization Fund https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/finances-and-operations

Finances and Operations ESF ASSETS AND LIABILITIES The following lists show the types of assets and liabilities that are on the ESF's balance sheet. These balance sheet items are described below. The latest ESF financial statements are also available. ESF Monthly Financial Statement https://home.treasury.gov/system/files/206/February_FY20_Financial_Statements.pdf ASSETS Special Drawing Rights U.S. Government Securities Euros Yen LIABILITIES SDR Allocations SDR Certificates US GOVERNMENT SECURITIES Under current Treasury policy, the ESF's dollar funds are invested in one-day, non-marketable US Treasury securities, redeemable on demand, bearing interest at a market-related overnight rate of return. SDRS US holdings of SDRs and transactions in SDRs are for the ESF's account. Currency payments for purchases of SDRs, payments of charges and assessments and receipts of interest on SDR balances are also for the ESF's account. YEN AND EUROS The ESF's foreign currency assets are invested in foreign central bank deposit accounts and marketable investments in foreign government securities. Currently, these deposits and securities are only yen- and euro-denominated. The ESF's foreign currency portfolio includes cash accounts at official institutions, securities issued by foreign governments, and, in the case of euros, investments through repurchase agreements in foreign government securities. SDRCS Under the Special Drawing Rights Act of 1968, the Secretary of the Treasury is authorized to issue SDRCs to the Federal Reserve in return for dollars. The dollars received increase the ESF's assets, but with a corresponding increase in liabilities in the form of the SDRCs that are issued. Treasury has a written understanding with the Fed that the SDRCs will be redeemed when ESF dollar holdings appear to be in excess of foreseeable requirements. Treasury does not pay interest on SDRCs. SDR ALLOCATIONS SDR allocations are a liability of the ESF. However, the ESF would have to repay them only if the IMF decided to cancel allocations, the US withdrew from participating in the SDR Department, or the IMF itself was dissolved. Members of the SDR Department are charged interest on their SDR

https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/legislative-basis

Exchange Stabilization Fund allocations and receive interest on their SDR holdings. Because the ESF's SDR holdings are greater than allocations, the ESF receives net interest on its SDR position. The ESF's SDR holdings came to exceed its SDR allocations primarily as a result of net acquisitions of SDRs by the ESF in transactions with other IMF members over the years. These issues are further discussed in Treasury's quarterly report to Congress on the cost of US participation in the IMF HOW THE ESF OPERATES The ESF can undertake three main types of operations -- the purchase or sale of foreign currency, the acquisition or use of SDRs, and loans or credits to foreign governments or entities. Also, the ESF can also enter into "warehouse" swaps with the Federal Reserve System, but there have been no warehouse swaps outstanding since 1992. Each of the types of operations is described below. PURCHASE OR SALE OF FOREIGN CURRENCY When the Secretary of the Treasury authorizes intervention in the foreign exchange market, the ESF enters the market to purchase or sell foreign currencies against dollars. As fiscal agent of the ESF, the Federal Reserve Bank of New York (FRBNY) executes the actual trading of foreign currencies and dollars for the account of the ESF, handles the "back office" documentation of the trades, and invests ESF foreign currency balances. The foreign currency assets of the ESF are invested by FRBNY either in marketable foreign government securities or in demand and time deposit instruments provided by foreign central banks. Dollars held by the ESF are invested in nonmarketplace Treasury securities by Treasury's Bureau of Public Debt. ACQUISITION OR USE OF SPECIAL DRAWING RIGHTS The SDR holdings of the United States are resources of the ESF. From time to time, the ESF may sell SDRs to or buy SDRs from other IMF member countries; usually, these transactions are arranged by the IMF. Also, SDRs have been used in paying the reserve asset portion of some past IMF quota increases. Treasury may issue SDRCs to the Federal Reserve, against the ESF holdings of SDRs, in return for dollars for purposes of financing SDR acquisitions or exchange stabilization operations. LOANS OR CREDITS The ESF can make loans or credits through temporary swap lines pre-negotiated with a prospective borrower. The ESF maintains a standing $3 billion short-term swap line, the Exchange Stabilization Agreement, with Mexico under the 1994 North American Framework Agreement. When a loan in the form of a "swap agreement" is drawn upon by the borrower, an agreed amount of ESF dollars is exchanged for an equivalent amount of the borrower's currency at an agreed exchange rate (generally, the current spot exchange rate) with a commitment to reverse the transaction at the same exchange rate at maturity. Treasury has the right at any time to terminate the swap agreement and require immediate repayment of the total amount drawn. From the mid-1970s to the early 1990s, almost all ESF credits were swap agreements providing "bridge" loans, i.e., short-term in maturity and expressly linked to, and repaid by a scheduled disbursement from an IFI (usually the IMF). However, the rationale for classic bridge loans diminished at the end of the 1990s, when the IMF and World Bank developed procedures allowing for more rapid disbursement of resources. When the ESF provided financial support for Mexico in 1995, it was through a medium-term credit. More recently, medium-term support was provided in 1998 through the ESF's participation in a multilateral guarantee of a Bank for International Settlements credit facility for Brazil.

https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund

Exchange Stabilization Fund

Under the ESF statute, "a[n ESF] loan or credit to a foreign entity or government of a foreign country may be made for more than 6 months in any 12-month period only if the President gives Congress a written statement that unique or emergency circumstances require the loan or credit be for more than 6 months." Such notifications were provided regarding ESF credit exposure to Mexico in 1982, to Mexico in 1995, and to Brazil in 1998. WAREHOUSING The Federal Open Market Committee of the Federal Reserve can permit the Treasury to "warehouse" some amount of foreign currency, if needed and appropriate, with the Federal Reserve System for the purposes of making more dollar resources available for ESF operations. Warehousing arrangements have only been used in a few specific instances. In a warehousing transaction, the ESF makes a spot sale of foreign currency to the Federal Reserve System and simultaneously commits to repurchase the currency at a market-determined forward price on a specific future maturity date. Authorization to conduct warehousing operations has been renewed annually by the FOMC as a part of its foreign currency directive to the Federal Reserve Bank of New York for the System Open Market Account. The limit on warehousing is $5 billion, but this limit was temporarily raised to $10 billion in 1989 and $20 billion in 1995. The last use of the warehousing arrangement was during the period 1988-1992. https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/exchange-stabilization-fund-history

Exchange Stabilization Fund History Credit Operations https://home.treasury.gov/resource-center/international/ESF/Documents/credits.pdf The ESF began to conduct foreign exchange market intervention transactions in 1934 and 1935. Also, it entered into credit arrangements, starting in 1936. From 1936 to the present, the ESF has participated in over a hundred credit or loan arrangements with foreign governments or central banks. After World War II, the ESF conducted Treasury's monetary gold transactions and widened its participation in credit arrangements. Tables presenting data on all ESF intervention operations since 1973 and all ESF credit arrangements since 1936 can be accessed through the links above. Researchers should note that these data are for the ESF only and do not cover the operations of the Federal Reserveâ&#x20AC;&#x2122;s System Open Market Account (SOMA). Historically, U.S. intervention has been jointly financed by both the ESF and SOMA, and the financing has been equally shared between the two accounts. INTERVENTION OPERATIONS Treasury policy during 1961-71 period focused on deterring capital outflows from the United States and giving major foreign central banks an incentive to hold dollar reserves rather than demand gold from the U.S. gold stock. The ESF resumed intervention operations in the foreign exchange market in March of 1961 (for the first time since the mid-1930s), but it soon became apparent that the resources of the ESF alone were too small to sustain transactions of the magnitude necessary. At the invitation of the Treasury, the Federal Reserve joined in foreign exchange operations in February 1962. The Federal Reserve entered into a network of swap agreements with other central banks [2] in order to obtain foreign currencies for short-term periods for use in absorbing forward sales of dollars by foreign central banks hedging exchange risk on their dollar holdings. To provide foreign currency to repay the Fed's swap drawings, the Treasury during the 1960s issued non-marketable foreign currency-denominated medium-term securities (Roosa bonds) and sold the proceeds to the Fed.

https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/legislative-basis

Exchange Stabilization Fund

In August 1971, the United States ceased conducting gold transactions with foreign monetary authorities, and the need to moderate the drain on the US gold stock was eliminated. In December 1974, ESF turned over, in a sale at par value, a gold balance of 2.02 million ounces (valued at $85 million) to the Treasury General Account. This gold had been acquired prior to August 1971 through gold transactions that the ESF engaged in with foreign monetary authorities and with the market for the purpose of stabilizing the value of the dollar relative to gold. In a public announcement of this sale of gold by the ESF to the Treasury General Account, the Treasury stated that the sale was made "in view of the likelihood that the Exchange Stabilization Fund [would] not be engaging in further transactions to stabilize the value of the dollar relative to gold." [3] Later in the 1970s, the US monetary authorities built up foreign currency reserves substantially. For this purpose, the ESF entered in a $1 billion swap agreement with the Bundesbank in January 1978 (which has since been allowed to expire). In connection with the dollar support program announced in November 1978, the Treasury issued foreign currency-denominated securities (Carter bonds) in the Swiss and German capital markets to acquire additional foreign currencies needed for sale in the market through the ESF. The United States also drew its reserve position in the IMF. In the mid-1980s, the major industrial nations embarked on a process of intensified policy coordination. The Group of Five's (G-5) Plaza Agreement in September 1985 served to reinforce exchange rate adjustments among the major currencies and occasioned substantial coordinated intervention sales of dollars. The G-5 "agreed that exchange rates should play a role in adjusting external imbalances … should better reflect fundamentals … and that … some further orderly appreciation of non-dollar currencies against the dollar is desirable." In the Louvre Accord of February 1987, the major industrial countries agreed that the exchange rate changes since the Plaza Agreement would "increasingly contribute to reducing external imbalances and … [had] brought their currencies within ranges broadly consistent with underlying economic fundamentals …[and] agreed to cooperate closely to foster stability of exchange rates around current levels." They adopted specific measures and cooperative arrangements reflecting their view that their currencies were broadly consistent with underlying economic fundamentals. This framework for cooperation on exchange rates complemented the broader economic policy coordination efforts to promote growth and external adjustment. In December 1987, the Group of Seven (G-7) reaffirmed Louvre's basic objectives and policy directions and agreed to intensify their economic policy coordination efforts and to cooperate closely on exchange markets. There was continued active cooperation through late 1989, but such activities became less frequent thereafter and halted in mid-1990. From the time of the Plaza Agreement until mid-1990, the U.S. monetary authorities were involved in episodes of net purchases of dollars vs. foreign currencies and episodes of net sales of dollars vs. foreign currencies. These operations were generally carried out in conjunction with operations by a number of other countries’ monetary authorities, including those of the major industrialized countries. During 1993-1995, the U.S. monetary authorities again joined other monetary authorities in purchases of dollars vs. other major currencies. In one instance, this joint intervention was explicitly linked to a view among the G-7 countries that exchange rate movements had gone beyond levels justified by underlying economic conditions. In June 1998, the U.S. monetary authorities purchased yen in the context of Japan’s plans to strengthen its economy. In September 2000, the U.S. authorities bought euros in a coordinated intervention operation that the European Central Bank initiated out of concern about the potential implications of euro exchange rate movements for the world economy.

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Exchange Stabilization Fund CREDIT OPERATIONS The ESF has a long history of credit operations beginning in the early years of its existence. In connection with these operations, the ESF had a large number of swap lines after World War II, primarily with Latin American countries, but these were gradually eliminated. By 1970, only a swap line with Mexico remained and, in 1994, this swap line was brought under the North American Framework Agreement, which also covers Federal Reserve and Bank of Canada swap lines with Mexico. Starting in the mid-1970s, ESF credit operations arrangements have for the most part involved ad hoc swap agreements rather than standing swap lines. The tables accessible through the â&#x20AC;&#x153;Credit Operationsâ&#x20AC;? link above show ESF credit arrangements that entered into force from 1936 to 2002 and provide a brief description of each. In addition to the arrangements listed here, Treasury extended to the United Kingdom an overnight credit in September 1967 and a $200 million line of credit in March 1968, both as part of multilateral operations to support the pound sterling in the foreign exchange market. [2] The Federal Reserve eliminated almost all of its swap lines after years of disuse and in connection with the advent of the European Central Bank on January 1, 2000 and now has swap lines only with Mexico and Canada under the 1994 North American Framework Agreement. [3] The ESF again had gold on its books for a short period in 1978 as a counterpart to an ESF credit to Portugal. https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund/esf-reports

ESF Reports LATEST FINANCIAL REPORTS The Gold Reserve Act requires the Secretary of the Treasury to submit to the President and Congress an annual report on the operations of the ESF. That report includes sections on the nature and functions of the ESF, exchange market developments, ESF financial operations, financial statements, and an audit report. ESF Annual Report for Fiscal Year 2014 https://home.treasury.gov/system/files/206/DoT_ESF-Audit-Report-FY2014.pdf

ESF Annual Report for Fiscal Year 2015 https://home.treasury.gov/system/files/206/oig-final-FY15-ESF-Audit-Report.pdf

ESF Annual Report for Fiscal Year 2016 https://home.treasury.gov/system/files/206/FY2016-ESF-Audit-Report.pdf

ESF Annual Report for Fiscal Year 2017 https://home.treasury.gov/system/files/206/FY2017-ESF-Audit-Report-Final.pdf

ESF Annual Report for Fiscal Year 2018 https://home.treasury.gov/system/files/206/ESF-Annual-Report-for-Fiscal-Year-2018.pdf

ESF Annual Report for Fiscal Year 2019 https://home.treasury.gov/system/files/206/ESF-Annual-Audit-FY2019.pdf

The Gold Reserve Act further requires the Secretary of the Treasury, within 30 days after the end of each month, to transmit to the House and Senate Banking Committees a detailed financial statement of the ESF, including all agreements entered into and renewed and all liabilities projected to occur. ESF Monthly Financial Statement https://home.treasury.gov/system/files/206/February_FY20_Financial_Statements.pdf

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Exchange Stabilization Fund ESF loan agreements are transmitted to Congress under the Case Act, within 60 days of their entry into force. Treasury customarily issues a brief press release announcing specific ESF agreements with foreign monetary authorities OTHER REPORTS Public information on the ESF is considerable in scope, but such information is dispersed across a number of reports that are designed to serve a wider Treasury or U.S. government financial purpose. Public reports which in some degree reflect ESF operations are listed here in order of frequency of publication, and these are now made more readily accessible by the links that follow: FMS Daily Treasury Statement aggregates Treasury cash and debt operations which may reflect ESF activities. While the ESF is not expressly identified in the Daily Treasury Statement, any flow of dollars into or out of the ESF is reflected in the reconciliation of public debt transactions (either issues or redemptions) in Table III-A to cash in Table III-B. Federal Reserve's Weekly Statement of condition (later in quarterly Federal Reserve Bulletin) provides a balance sheet of the Federal Reserve System in which the amount of Special Drawing Rights Certificates outstanding is indicated; Treasury's Weekly Press Release on U.S. Foreign Exchange Reserves shows the levels of various official foreign assets (foreign exchange, SDRs, U.S. reserve position in the IMF, and gold). Only the foreign exchange and SDR components of official reserves are assets of the ESF. Of the foreign exchange component, the total is divided between the ESF and the Federal Reserve's System Open Market Account (SOMA). The foreign exchange assets of SOMA are not U.S. government assets and are not reflected in any U.S. government financial statement. The U.S. reserve position in the IMF and gold are not assets of the ESF but of the Treasury General Account. Treasury's Monthly Statement of Receipts and Outlays of the U.S. Government (Monthly Treasury Statement) reflects the ESF's gains or losses on transactions, net interest earnings, and valuation gains or losses. These are reflected in Table 5, in the Exchange Stabilization Fund item under Department of the Treasury. Also, Table 6 shows as an asset item the ESF's holdings of SDRs and as liabilities the SDR Certificates issued to the Federal Reserve. Treasury's Monthly Statement of the Public Debt of the United States reflects changes in the ESF's dollar holdings, which are invested in non-marketable Treasury short-term securities. These securities are reflected in the line item entitled "Exchange Stabilization Fund" in Table III, Detail of Treasury Securities Outstanding in the Exchange Stabilization Fund line item under the non-marketable category. Federal Reserve Bank of New York's Treasury and Federal Reserve Foreign Exchange Operations (FRBNY's quarterly report) recounts ESF operations in terms of quarterly totals and identifies operations in subperiods within the quarter. It also indicates the components of changes in ESF balances over the quarter. Treasury Bulletin publishes quarterly a summary of the ESF balance sheet and income statement. The summary balance sheet shows dollar assets, Special Drawing Rights (SDR) holdings, and holdings of individual foreign currencies.

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Exchange Stabilization Fund The Combined Statement of Receipts and Outlays of the United States Government (Annual Report) shows in Part III Detail of Appropriations, Outlays, and Balances, under Department of Treasury, Public Enterprise Funds, the beginning and ending balances for the fiscal year of the ESF's foreign currency assets, SDR holdings, investments in U.S. government securities (which arae the ESF's holdings of dollars), and the factors in the change in the balances. In Part I, the summary general ledger account balances show under Asset Accounts the ESF's holdings of SDRs and the amount of SDR Certificates outstanding to the Federal Reserve and under Liability Accounts the SDR allocations that appear as a liability on the ESF balance sheet. In the Financial Report of the U.S. Government, Note 2, "Cash and Other Monetary Assets," to the notes to the financial statements includes ESF assets. The Accountability Report of the Treasury Department covers the investments and foreign currency denominated assets of the ESF in Notes 4 and 5 of the Department's financial statements. OMB's Budget Appendix provides balance sheet information on the ESF and extrapolates interest its income for future budget years.

https://www.newyorkfed.org/aboutthefed/fedpoint/fed14.html Exchange Stabilization Fund FEDPOINT 1. The Treasury Department's Exchange Stabilization Fund (ESF) buys and sells foreign currency to promote exchange rate stability and counter disorderly conditions in the foreign exchange market. 2. The ESF is used to provide short-term credit to foreign governments and monetary authorities and to hold and administer Special Drawing Rights. 3. ESF operations are normally conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury Department. The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and counter disorderly conditions in the foreign exchange market. The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President. When the United States adopted the revised articles of agreement of the International Monetary Fund (IMF) in 1978, Congress amended the Gold Reserve Act to provide that the dealings of the ESF were to be consistent with U.S. obligations to the IMF. The ESF also may provide short-term credit to foreign governments and monetary authorities. These ESF "bridge loans" are financed through swaps. That is, the dollars held by the ESF are made available to a country through its central bank in exchange for the same value of that country's currency. The ESF is used to hold and administer Special Drawing Rights (SDRs), which are assets created by the IMF that the IMF lends to countries that need help to finance balance-of-payment deficits. SDRs were created to increase international liquidity and are permanent resources of the ESF after they are allocated to, or otherwise acquired by, the United States Treasury. The Federal Reserve and the ESF ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury. The New York Fed, which executes foreign operations on behalf of the Federal Reserve System and the Treasury, acts as an intermediary for the parties involved when the ESF provides short-term financing to foreign governments. However, it neither guarantees, nor profits from, the loans. Several times each day, the foreign exchange trading desk of the New York Fed provides current information on market conditions to the Treasury. Whenever necessary, the trading desk buys or sells foreign currencies on behalf of the Treasury, through the ESF, for intervention purposes. Treasury and Federal Reserve foreign exchange operations are closely coordinated and typically are conducted jointly. Operations on behalf of the Treasury are made under the legal authority of the Secretary of the Treasury and those for the Federal Reserve System under the legal authority of the Federal Open Market Committee, the central bank's policy-making group. The ESF does not provide financing to the Federal Reserve System for foreign exchange operations. Rather, the Federal Reserve participates with its own funds. The Treasury reimburses the New York Fed for expenses incurred in carrying out Treasury actions. Since 1963, the Federal Reserve occasionally engaged in "warehousing" transactions with the ESF. In warehousing a transaction, the ESF sells foreign currencies to the Federal Reserve for dollars and simultaneously arranges to repurchase them, typically within a year. The dollars are immediately credited to the Treasury's account at the New York Fed, and the Federal Reserve invests the

Exchange Stabilization Fund warehoused foreign currency, separate from its regular accounts, to earn a market rate of return. Any effect warehousing has on domestic bank reserves is offset by open market operations. ESF accounts and activities are subject to Congressional oversight. The Treasury provides monthly reports on U.S. intervention activities and a monthly financial statement of the ESF to Congress on a confidential basis. In addition, the quarterly report to Congress by the New York Fed's manager of foreign operations, covering Treasury and Federal Reserve foreign exchange operations, is issued publicly by the New York Fed. ESF Financing The ESF was structured to be self-financing. Its resources, which are held in both dollars and foreign currency, include its original Congressional appropriation and retained earnings. The Gold Reserve Act of 1934 initially funded the ESF with resources resulting from the devaluation of the dollar, in terms of gold. Congress appropriated $2 billion of the resulting valuation gain to the ESF; $1.8 billion of that was later used to fulfill the initial U.S. quota subscription to the IMF. Currently, the New York Fed invests ESF foreign currency balances in instruments that yield marketrelated rates of return and have a high degree of liquidity and credit quality, such as securities issued by foreign governments. In addition to interest earned on assets, the ESF's balance sheet also includes gains or losses on exchange operations. As of March 31, 2007, total assets were $45.9 billion and included $20.8 billion in foreign currencies, $9 billion in SDRs, and $16.1 billion in U.S. Government securities. MAY 2007