how does non-bank broker dealers borrow money from Fed indirectly?

--Citigroup, with the Federal Reserve’s assistance, appears to have found a way to use the easier access to the discount window to inject cash more directly into illiquid mortgage markets. --Since the Fed eased conditions for borrowing from its discount window Friday in an effort to restore liquidity to credit markets, banks, securities dealers and others have searched for ways to exploit it. One constraint is that only banks have access to the discount window but most of the liquidity in credit markets is supplied by securities dealers. Many banks like Citigroup own securities dealers but section 23A of the Federal Reserve Act imposes limits on loans between the bank and dealer units to protect the taxpayer-backed bank deposit insurance fund. --The Fed, in a letter sent to Citigroup Monday, exempted it from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets. In the letter, the Fed said it would permit Citibank to lend up to $25 billion to “market participants in need of short term liquidity to finance their holdings of certain mortgage loans and related assets,” and it could channel the transactions through Citigroup Global Markets in the form of offsetting repurchase agreements, which are short-term loans secured by financial assets. --The amount a bank can lend to an affiliate is normally capped relative to its capital. The Fed said it was using its authority to exempt Citigroup from that cap “in the public interest.” The exemption, it said, would last as long as the Fed’s modified discount window program. --The letter makes no mention of whether Citigroup would actually use discount window loans with its new flexibility, or how much it might borrow to do so. On Wednesday Citi, J.P. Morgan Chase & Co., Bank of America Corp. and Wachovia Corp. each said they had borrowed $500 million from the discount window. A spokeswoman for Citigroup declined to comment on the bank’s request for the exemption and its approval. Both J.P. Morgan and Bank of America have received similar exemptions, people familiar with the matter said. --Last week, Citi, J.P. Morgan Chase & Co. and Bank of America had explored ways of using Fed loans to together inject $75 billion into the asset-backed commercial paper, mortgage securities markets, and other instruments The Wall Street Journal reported Monday. --Citi will channel these transactions through allifiated broker-dealer unit, which uses the forms of reverse repos or securities finance transactions(SFT) to lend money to other unaffliated broker-dealers.