Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Thanks, Bill. We will propose auctioning the options in two $25 billion offerings. This will allow dealers to adjust their bidding behavior in response to the first auction results. The first TSLF options program (TOP) auction is currently anticipated during the week of September 1 for the option to lock in TSLF financing over the September quarter-end. We expect to hold the second auction two weeks later. These auctions will be in addition to our ongoing TSLF auction cycle. Thus, there will be two TSLF schedule 2 auctions totaling $125 billion and another two TSLF schedule 1 auctions totaling $50 billion that will also span quarter-end. The plan is to hold TOP auctions against schedule 2 collateral in weeks on either side of the two regular TSLF schedule 2 auctions during the months ahead of quarter-ends or year-ends. The first of these auctions would be for $25 billion. If that auction is undersubscribed, we intend to add the unused option authorization to the second auction two weeks later.

Each auction will offer the option for dealers to borrow general collateral Treasury securities against pledges of TSLF schedule 2 collateral, which includes AAA-rated private-label residential and commercial MBS and ABS, agency CMOs, and the basket of collateral already eligible for our regular open market operations. Our initial recommendation is for the options to have a one-week duration spanning the month-end and a strike price of 25 basis points, annualized. The strike price represents the lending fee that the dealer is willing to pay to borrow general collateral Treasury securities against pledges of their choice of schedule 2 collateral. This fee concept is very familiar to the dealers participating in both the TSLF auction program and the Desk’s regular daily securities lending auction. The 25 basis point strike price for the TOP correlates to the minimum fee already in force that dealers can bid in the regular 28-day TSLF schedule 2 auctions.

Dealers will bid for these options by specifying the quantity of TSLF options they demand and the price or premium they are willing to pay for the set maturity loan at the set lending fee. As with the TAF and the TSLF, a minimum bidding premium level will be set. We are recommending a minimum bid of 1 basis point with bidding increments of 0.1 basis point. Volume parameters will be similar to those of the TSLF—a $10 million minimum with a maximum of 20 percent of the auction size for any one dealer. We expect that auctions will be held in the afternoons with results posted very shortly after the auctions close. The premium that each dealer will pay will be determined by the competitive single-price auction process, in which the accepted dealer bids will be awarded at the same premium, which shall be the price at which the last bid was accepted. The options will not be transferable between dealers. Dealers who have received awards in the auction will have to notify the New York Fed at least one day before the exercise date if they wish to enter into the TSLF loan. Dealers may also let the options expire unexercised at no cost beyond the premium paid at auction. All haircuts, collateral eligibility, and settlement conventions will be the same for the TOP as they are for the TSLF. As Bill noted earlier, and consistent with how the program parameters were developed for the TSLF program, we expect to develop more precisely the terms and conditions of the TOP after consultation with the primary dealers. Should the Committee approve the proposal this afternoon, we expect these conversations to begin shortly after the announcement next week. Thank you. Please let me turn the floor over to Sandy Krieger to discuss the TAF maturity extension proposal.

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