Sunday, August 9, 2009

the Fed‘s interaction with the U.S. Treasury

the U.S Treasury holds its principal checking accounts at the twelve Federal Reserve banks and their branches. In its capacity as the Treasury‘s banks, the federal Reserve System maintains and services these Treasury deposits, processing the receipts and disbursements from those accounts that are associated with the Federal government‘s taxation and spending policies. As the primary fiscal agent of the Treasury, the Federal Reserve handles most of these duties, although private depository institutions may become" special depositors " of the Treasury (shades of the "pet banks' of the Jacksonian era) provided that they pledge enough of their own holdings of Treasury securities or other acceptable collateral (which then are called pledged assets)to secure fully the Treasury‘s accounts with these institutions. In fact, the Treasury holds most of its deposits with private banks, from whom it earn market interest rates.
The federal Reserve also handles much of the paperwork and legwork associated with issuing and redeeming Treasury securities. When the Treasury offers a new issues of securities, the federal reserve banks receive the applications of depository institutions, dealers, and other who wish to purchase them. The Fed, on instructions from the Treasury, Separates the securities into allotments for delivery to purchasers, and it processes their payments for deposit into Treasury‘s accounts.
The Fed also redeems government securities from the Treasury‘s accounts when they mature. it also makes periodic interest coupon payments from the Treasury‘s accounts.Furthermore, it issues and redeems U.S. savings bonds and notes and assists private depository institutions that apply for and receive designation to act as agents for disbursing and redeeming these Treasury instruments.
As we discuss in more detail later , more than paperwork is entailed in the Fed‘s securities services to the Treasury . Much of the trading in primary and secondary markets for Treasury securities now is conducted on electronic networks. The Fed operates and supervises much of this trading activity, thereby ensuring that the markets for government securities remain active and liquid, which generally benefits the Treasury by lowering potential investors‘ perceptions of riskiness from holding or trading the treasury‘S debt.
This and other forms of electronic trading networks are important features of today‘s payments System.

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