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April 30, 2008
The Bank prices all credit products according to market conditions and the following specific criteria:
- The Bank's cost of funds;
- Competitive sources of funds for borrowers;
- The Bank's alternative investment opportunities;
- The Bank's cost of delivering products (general and administrative expenses); and
- Bank profitability targets.
Members can receive prices for the Bank's credit products by contacting the Money Desk, at 1-800-357-3452, during normal business hours, and prices for many of the Bank's products are also available in the "Rates" section of the Bank's Web site, www.fhlbboston.com.
The Bank is required by regulation to price its credit products consistently and without discrimination to all members applying for advances. The Bank is also prohibited from pricing its advances below its marginal cost of matching term and maturity funds in the marketplace, including embedded options, and the administrative cost associated with making such advances to members (see 12 CFR 950.5(b)(1)). However, the Bank may price advances on a differential basis, based on the creditworthiness of members, volume, or other reasonable criteria applied consistently to all members (see 12 CFR 950.5(b)(2)).
In general, the Bank attempts to provide a rate that is competitive with comparable wholesale funding alternatives that are available to members. The Bank surveys alternatives such as federal funds, repurchase agreements, brokered CDs, negotiable time deposits, and interest rate swaps to determine the cost of wholesale funding alternatives. However, as noted above, the Bank must price its advances offerings at or above its cost of matching term and maturity funds, including embedded options and administrative costs. Moreover, the Bank must make advances profitable in order to meet its financial performance objectives and to provide an adequate return to shareholders. For these reasons, the Bank’s Asset-Liability Committee (ALCO) establishes minimum spread requirements relative to its funding costs for all products. From time-to-time, depending on market conditions, the Bank’s funding cost plus its minimum required spread for a given product may not be competitive with members’ wholesale funding alternatives.
From time to time, a lower-than-posted rate may be available on advances of $10 million or more for advances products other than the Daily Cash Manager. In order to promote equal access to "special" pricing to all members, the Bank offers regularly scheduled specials that approximate those offered for single large transactions. Examples of the Bank's regularly scheduled specials include: a markdown on short-term advances with maturities of one month, three months, six months, and twelve months that typically is held every Tuesday; and bullet special for fixed-rate advances that typically is held on the first Wednesday of each month. Additionally, for unscheduled advance specials greater than $10 million priced at discounted rates, the Bank attempts to make the discounted rate available to the entire membership subject to market conditions and time constraints.
The Daily Cash Manager is primarily priced based on the federal funds market, which is highly variable and dynamic, but also references the Bank’s cost of funding. As such, Daily Cash Manager pricing is subject to change more frequently than other advances products, and at irregular intervals. In general, the Bank’s execution is likely to be better during the morning hours when the Bank has access to issue overnight discount notes, but this performance cannot be guaranteed. After the overnight discount note window is no longer available (usually in the early afternoon) the Bank’s alternative funding source becomes federal funds. Therefore, in order to earn a profit margin, the Bank is generally required to price Daily Cash Manager advances at levels at or above the offered-side federal funds rate after the discount note window closes.
The Bank also offers discounts on the Rollover Cash Manager account and on advance products with at least one year to maturity based on the member's percentage of advances to assets under the Percent of Assets Incentive Discount (PAID) program. The discounts under this program are one, two, and three basis points for members with advances to assets ratios of 10%, 15%, and 20%, respectively. These discounts apply only to rates on programs outside the AHP, CDA, and NEF programs that are not discounted in any other way.
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