MNI: Fed Releases Pricing Details for Muni Bond Facility -Text

     WASHINGTON (MNI) - The following is an excerpt from the Federal Reserve's

FAQ on how it will determine pricing under its Municipal Liquidity Facility,

released Monday. 

     C7. How will the Federal Reserve determine pricing under the MLF? 

     Under Section 13(3) of the Federal Reserve Act and the Board's Regulation

A, the interest rate on the Eligible Notes must be a penalty rate, meaning a

rate that is a premium to the market rate in normal circumstances, affords

liquidity in unusual and exigent circumstances, and encourages repayment of the

Eligible Notes and discourages use of the Facility as the unusual and exigent

circumstances that motivated the program recede and economic conditions

normalize.

     The SPV will purchase Eligible Notes with a fixed interest rate that is

determined on the pricing date of the Eligible Notes. The method of sale

selected by an Eligible Issuer will not affect the determination of the interest

rate. The Federal Reserve's pricing methodology will be publicly available and

applicable to all Eligible Issuers. The pricing methodology will be based on the

overnight indexed swap (OIS) rate for a comparable maturity plus a fixed spread

that corresponds with the ratings of the Eligible Notes and their relevant tax

status. The ratings considered in pricing the Eligible Notes will be all of the

Eligible Issuer's long-term ratings from major NRSROs for the specific credit of

the Eligible Notes at the time of pricing of the Eligible Notes. If the credit

has different ratings (i.e. "split ratings"), the applicable spread will be

determined by calculating an average of all of the confirmed ratings. If

interest on the Eligible Notes is not excluded from gross income for federal

income tax purposes, the pricing of the Eligible Notes will be calculated using

the methodology for taxable notes. If the SPV purchases multiple Eligible Notes

from the same Eligible Issuer over the term of the MLF, pricing will be

determined based on the ratings as confirmed by the applicable major NRSROs on

the pricing dte of each Eligible Note.

     See Appendix B for the MLF pricing grid and methodology. This pricing grid

and methodology are subject to revision should market conditions change

materially. Any such revisions will be made available on the FRBNY's website for

the MLF.

Rating*                 Spread (bps)

------------------------------------

AAA/Aaa                          150

AA+/Aa1                          170

AA/Aa2                           175

AA-/Aa3                          190

A+/A1                            240

A/A2                             250

A-/A3                            265

BBB+/Baa1                        325

BBB/Baa2                         340

BBB-/Baa3                        380

Below Investment Grade           590

     C8. What is OIS? 

     An overnight indexed swap (OIS) is an interest rate derivative contract in

which parties exchange a payment priced at a fixed rate against a payment priced

at an average overnight published reference rate, such as the effective federal

funds rate. The MLF will use the fixed OIS rate based on the effective federal

funds rate for the maturity that corresponds to the maturity of the Eligible

Notes.

     C9. May Eligible Notes have a maturity for which no direct OIS quote is

available? 

     Yes. Eligible Issuers may select any maturity up to 36 months. If an

Eligible Issuer selects a maturity for which no direct OIS quote is available,

the OIS rate for the Eligible Notes will be calculated using a straight line

interpolation of the direct OIS quotes for the nearest maturity that is shorter

than the Eligible Notes and the nearest maturity that is longer than the

Eligible Notes. The calculation will be conducted by the SPV on the pricing date

of the Eligible Notes. 

     C10. How will the Eligible Notes be priced if the credit for the Eligible

Notes has split ratings?

     To account for split ratings across different credit rating agencies, an

average rating will be calculated by assigning a numerical value to each

outstanding rating of the credit for the Eligible Notes from a major NRSRO and

rounding the average of such numerical values to the nearest numerical value

that corresponds to a rating. If an average rating is equidistant between the

numerical value corresponding to one rating and the numerical value

corresponding to another rating, then the Eligible Issuer will be treated as

having the lower rating. However, if a credit has only two ratings from major

NRSROs and one of the ratings is two or more gradations higher than the other

rating, then the Eligible Issuer will have the option to either (1) obtain a

third rating from a major NRSRO and price the Eligible Notes based on the

average of its three ratings or (2) price the Eligible Notes based solely on the

lower of the two existing ratings.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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