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

Thanks, Bill. Should the Committee approve the proposal for the TSLF, we intend to announce tomorrow to the public the total program size envisioned as of today—as Bill mentioned, up to $200 billion. It will consist of $100 billion against pledges of OMO-eligible collateral and $100 billion against pledges of TSLF-eligible collateral beyond the OMO-eligible. Together the two tranches will be comparable in size to the TAF program plus the recently announced 28-day single tranche RPs.

For an immediate impact, we are thinking about auctioning $50 billion in each of the tranches at the outset, with the first auction occurring during the week of March 24. Specifically, the plan is to hold separate 28-day auctions for each main category of collateral in successive weeks with our primary dealer counterparties. We will auction the first tranche against pledges of OMO-eligible collateral on Thursday, March 27, to settle the following day (T+1) and to mature 28 days hence, and we will auction the second tranche against pledges of the non-OMO-eligible collateral on the following Thursday, April 3, also for T+1 and for a period of 28 days. The auctions will be held at 2:00 p.m. and will close at 2:30 p.m. with results posted shortly thereafter. We plan to auction in this pattern, each Thursday, alternating between the two collateral tranches for the duration of the facility.

The auctions will be based on a fee rate, in a bonds-versus-bonds construct. It is similar to our daily securities lending operations, and it is very familiar to our primary dealers. The fee rate bid will represent the spread, in basis points, between the cost of 28-day financing of general collateral Treasury securities and the cost of 28-day financing of the respective basket of collateral in the respective tranche. As with the TAF auctions and our daily securities lending operations, a minimum fee will be set by the Federal Reserve Bank of New York for each of the collateral tranches ahead of each auction. The fee will be set by a competitive single-priced auction process in which the accepted dealer bids will be awarded at the same fee rate, which shall be the lowest fee rate at which bids were accepted. Similar to our temporary open market operations, haircuts for the OMO-eligible collateral pledged will be the same, given that the facility is open to the same set of counterparties—the primary dealers—and the collateral in this tranche is identical. In addition, the Federal Reserve Bank of New York will use the services of the major clearing banks, BONY and JPMorgan Chase, and all transfers of collateral will be made through the borrower’s clearing bank account. This is how we do things for our open market operations.

Overall, the terms and conditions are similar to those of the TAF auctions in the following ways. There will be a 28-day fixed fee determined via a single-price centralized auction. The TSLF will have a minimum fee rate, and settlement will be forward settling. The term of operation will be 28 days except for holiday conflicts. The TSLF will have a minimum bid amount ($10 million as opposed to $5 million in the TAF). The maximum number of bids per participant will be two. The total propositions for each bid submitted and the total award may not exceed a specified percentage of the announced offering amount. We are contemplating a 20 percent limit per dealer. If a participant ceases to qualify for the TSLF (if it is no longer a primary dealer, for instance), the Federal Reserve Bank of New York may accelerate the unwinding of the loan, making the return of any pledged collateral immediately due.

The main differences between the TAF and the TSLF are as follows. They involve different sets of counterparties. The TAF provides direct funds, and the TSLF will provide securities. A different range of collateral is accepted: The TSLF is limited to OMO-eligible collateral and AAA non-agency residential-mortgage- backed securities. We expect to assess higher haircuts on non-OMO-eligible collateral as loans will be to the primary dealers and not to depository institutions. Overall we expect haircuts to be higher than those in normal times but lower than those in extremis. The haircuts on non-OMO-eligible collateral are expected to be higher than those on OMO-eligible collateral.

We expect to develop the terms and conditions of the TSLF more precisely after consultation with the primary dealers and the clearing banks. Should the Committee approve the proposal this evening, we expect these conversations to begin shortly following the announcement. Thank you.

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