Wednesday, July 30, 2008

What is the Fed's new TOP facility?

The FOMC has authorized the Federal Reserve Bank of New York to auction options for primary dealers to borrow Treasury securities from the TSLF. The Federal Reserve intends to offer such options for exercise in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends. Under the options program, up to $50 billion of draws on the TSLF using options may be outstanding at any time. This amount is in addition to the $200 billion of Treasury securities that may be offered through the regular TSLF auctions. Draws on the TSLF through exercise of these options may be collateralized by the full range of TSLF Schedule 2 collateral. (Schedule 2 collateral includes Treasury securities, federal agency debt securities, mortgage-backed securities issued or guaranteed by federal agencies, and AAA/Aaa-rated private-label residential mortgage-backed, commercial mortgage-backed, and asset-backed securities.) Additional details of this program will be announced once consultations with the primary dealer community have been completed.

Here's and excerpt from their FAQ (“TOP”: Term Securities Lending Facility Options Program)

What is TOP?
TOP offers options on a short-term fixed rate Term Securities Lending Facility (“TSLF”) bond-for-bond loan of general Treasury collateral against a pledge of eligible collateral. The term of the loan typically spans a short period of traditional collateral market dislocation, such as a quarter-end dates. While the price of the loan is fixed, the price of the option is determined by competitive bidding.

What is the purpose of TOP?
TOP is intended to enhance the effectiveness of TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates.

How is TOP related to TSLF auctions?
TOP offers options on short-term TSLF loans at a future date. Option holders have the opportunity to exercise the option and borrow up to the amount awarded in the TOP auction at a fixed rate or allow the option to expire without a claim. Loans made through TOP are shorter in term than the 28-day TSLF loans. In most cases, the term and settlement of the loan will not coincide with regularly-scheduled TSLF auctions.

What is the typical length of a TOP-related loan?
TOP-related loans are shorter than TSLF loans, with terms of two weeks or less. They are targeted to span potentially stressed financing dates.

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