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Fed Puts CP Scorekeeping Under Microscope
Asset Backed Alert, Harrison Scott Publications Inc. (March 24, 2006)

The Federal Reserve Board is reviewing its tally for the volume of asset-backed commercial paper in the hands of investors, which market players have long complained is overstated.

A spokesperson at the Bond Market Association, which is working closely with the Fed on the effort, said it's unclear when the assessment will yield any results or what the outcome would be. But an e-mail that Merrill Lynch staffers circulated among conduit specialists this week indicated that the Fed is likely to restate its figures, after already offering a list of programs it includes in its calculations.

The volume of outstanding asset-backed commercial paper - $964 billion as of March 15, by the Fed's count - has attracted an increasing amount of attention in recent months because it could soon top $1 trillion for the first time. However, the Merrill professionals said in their e-mail that the total includes 131 corporate and bank programs that should be disqualified, and improperly omits 54 entities with $40 billion of outstandings. The net effect, they argued, is that the Fed's figure is usually about $60 billion too high.

"Many of you are aware that Merrill Lynch has been frustrated for years by the fact that our careful market analysis at the end of each calendar year has typically determined the market to be $50 to $60 billion less than the Federal Reserve estimate. Efforts to resolve this discrepancy have been summarily dismissed by Fed representatives," according to the e-mail, which lists each of the programs that Merrill wants to see included.

Not long after telling market players that the Fed would probably restate its figures, however, Merrill employees delivered an e-mail saying that any action related to the calculation is "not known and only speculation." It's unclear on what grounds they disagree with the Fed's methods of including and excluding issues.

Regardless of what happens, there's no denying that the conduit market has experienced explosive growth in recent years. The current outstandings are up nearly 30% from the yearend-2004 mark of $744 billion (see the Market Monitor on Page 11).



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