Term Auction Facility
December 1, 2009 in Government
- Issues short-term loans to qualifying depository institutions
- Has issued approximately $1.6 trillion in loans in 2009
The Term Auction Facility (TAF) is a “credit facility” which allows depository institutions to bid upon collateralized loans from their local Federal Reserve Bank. Under the program, depository institutions determined to be in good standing with their local Federal Reserve Bank can participate in auctions of short-term loans with varying terms. The facility was created in December of 2007 following a series of similar actions from the European Central Bank, the Bank of Canada, the Swiss National Bank, and the Bank of England. These actions involved opening “discount windows” through which centralized banking institutions may provide short-term loans to banks to improve liquidity.1
Creation of the Term Auction Facility
On December 12, 2007, the Federal Reserve announced the introduction of the Term Auction Facility, together with a series of coordinated actions by other central banks. In particular, the Fed established foreign exchange swap lines with the European Central Bank and the Swiss National Bank that would facilitate the two central banks’ extension of term loans in U.S. dollars to banks in their jurisdictions.
The first TAF auction was held on December 17, with subsequent auctions generally occurring every two weeks. The Federal Reserve indicated on December 21 that it would continue to hold auctions “for as long as necessary to address elevated pressures in short-term funding markets.” On March 7, 2008, the Fed announced that it would “continue to conduct TAF auctions for at least the next six months unless evolving market conditions clearly indicate that such auctions are no longer necessary.” The auctions appear to be a success in terms of participation, and they are mitigating difficulties in the funding markets.
Operation of Auctions
The Federal Reserve has typically conducted Term Auction Facility (TAF) auctions of twenty-eight-day term funding. The interval between auctions has been biweekly, except for periods around holidays.
The TAF operates in a fashion similar to the discount window: a Depository institutions eligible for primary credit through the discount window—those determined to be in generally sound financial condition by their District
Reserve Bank—can participate. Borrowing is fully collateralized; assets used as collateral are those eligible to be pledged at the discount window. The Federal Reserve uses standard discount window haircuts to value the collateral pledged. In addition, the maximum TAF funding for which an institution can bid, including loans that would be outstanding concurrent with that auction’s awards, cannot exceed 50 percent of available pledged collateral. Individual propositions per bidder at any auction are limited to a maximum of two. To promote a relatively large number of winning bids, the Fed limits the maximum auction award to any individual institution to 10 percent of the announced auction quantity. The minimum bid size was initially set at $10 million, but it was later reduced to $5 million to allow smaller institutions to participate. The TAF auction itself follows the single-price format used in Treasury auctions; the format is designed to encourage participation.2
A typical TAF auction occurred on March 10, 2008. At 10 a.m. ET, the Federal Reserve announced bidding. The announcement included information on when eligible banks could submit bids (11 a.m. to 1 p.m.), the amount of funds being auctioned ($50 billion), the minimum and maximum size of bids ($5 million and $5 billion—the latter representing 10 percent of the total amount), the minimum interest rate at which bids could be submitted (2.39 percent), the term of the loan (twenty-eight days), and other details. At 11 a.m., banks began submitting bids by telephone to their Reserve Bank.3
On March 11 at 10 a.m., the Federal Reserve announced the results of the auction.d The interest rate on the loans allocated was determined to be 2.8 percent (41 basis points above the minimum bid rate), eighty-two banks had submitted bids, and the total amount of propositions was $92.6 billion, or 1.85 times the amount available at auction. Finally, the winning banks had funds credited to their accounts on March 13 and they repaid the loans on April 10.4
| Table 1: Term Auction Facility Parameters5 | |
|---|---|
| TAF Rate | Fixed-rate determined via centralized single-price auction. |
| Term | 28-day or 84-day term as specified in the Announcement; may differ slightly to reflect holiday scheduling issues. |
| Collateral | Any collateral eligible to secure discount window loans. Reserve Banks’ standard valuation and haircut procedures apply. |
| Auction Cycle | Standard Auction Schedule* Auction Announcement: Monday, 10:00 a.m. ET Bid Submission: Monday, 11:00 a.m. to 12:30 p.m. ET Announcement of Results: Tuesday, 10:00 a.m. ET Notification of winning bidders: Tuesday after Announcement of Results Settlement Date: Thursday *Note: Some variation may be necessary to accommodate holidays. |
| Minimum Bid Amount; Bid Increment | $5 million; additional Bid increment in $100,000. |
| Minimum Award Increment | $10,000 |
| Maximum Number of Bids per Participant | Two |
| Maximum Bid Amount Aggregated Across All Bids for a Participant | Total propositions for up to two Bids should not exceed a specified percent of announced Offering Amount for the Auction. |
| Maximum TAF Available to Any Single Participant, based on Margined Collateral Value | A Participant may not submit an aggregate Bid amount in an Auction which, if such aggregate Bid amount were accepted in full, would cause it to fail to comply with the collateralization requirement set forth below. |
| Collateralization Requirement for an Advance of More Than 28 Days | The aggregate sum of all Advances outstanding with a term to maturity of more than 28 days shall not exceed 75% of the Collateral Value of the Collateral available to secure such Advances. A participant may not request any Advance of more than 28 days which, if extended by a Reserve Bank, would cause it to fail to comply with the foregoing collateralization requirement.
If, as a result of other Advances, the foregoing collateralization requirement is not met, the Participant is required to pledge additional Collateral with two (2) Business Days to cover the shortfall, failing which the Reserve Bank may exercise its remedial rights under OC-10. Notwithstanding the foregoing, this collateralization requirement does not apply to (i) any Advances made before July 30, 2008, (ii) any Seasonal Credit, (iii) an Advance with a remaining term to maturity of 28 days or less, or (iv) an Advance with a remaining term of maturity of 29 days, the 28th day of which is not a Business Day. |
| Eligible Depositories | Those eligible for primary credit–that is, those that (i) are in generally sound financial condition and expected to remain so during the term of the advance as determined by the respective Local Reserve Bank; (ii) have executed OC-10 and related documents; and (iii) have pledged assets to the Local Reserve Bank to secure OC-10 Indebtedness. |
| Prepayment | Not permitted. |
| Acceleration of TAF Advances | If a Participant ceases to qualify for primary credit while any TAF Advance is outstanding, the lending Reserve Bank may, in its sole discretion, accelerate the repayment of such Advance, which Advance is then immediately due and payable. |
| Minimum Bid Rate | Set at a level equal to the rate of interest that banks earn on excess reserve balances. |
| Auction Amount | Announced quantity determined by the Chairman of the Board of Governors, upon recommendation of the SOMA Manager. |
| Foreign Branches | Branches and agencies of foreign banks bid through their local Reserve Banks. With respect to a foreign bank with multiple branches and/or agencies which qualify to participate in an Auction, the following terms apply: (i) each such branch or agency may submit a maximum of two Bids; (ii) the collateralization requirement set forth above applies to each branch or agency; and (iii) a foreign bank, as a whole, may not submit more than two interest rates and the aggregate amount of all Bids submitted by all branches and agencies of a foreign bank may not exceed the Maximum Bid Amount. |
Auctions and Loan Totals6
On January 12, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $107.747 billion Total propositions accepted: $107.747 billion Bid/cover ratio: 0.72 Number of bidders: 97 The awarded loans will settle on January 15, 2009, and will mature on February 12, 2009. The stop-out rate shown above will apply to all awarded loans.
On January 26, 2009, the Federal Reserve conducted an auction of $150 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $136.051 billion Total propositions accepted: $136.051 billion Bid/cover ratio: 0.91 Number of bidders: 102 The awarded loans will settle on January 29, 2009, and will mature on April 23, 2009. The stop-out rate shown above will apply to all awarded loans.
On February 9, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $142.448 billion Total propositions accepted: $142.448 billion Bid/cover ratio: 0.95 Number of bidders: 117 The awarded loans will settle on February 12, 2009, and will mature on March 12, 2009. The stop-out rate shown above will apply to all awarded loans.
On February 23, 2009, the Federal Reserve conducted an auction of $150 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $111.683 billion Total propositions accepted: $111.683 billion Bid/cover ratio: 0.74 Number of bidders: 96 The awarded loans will settle on February 26, 2009, and will mature on May 21, 2009. The stop-out rate shown above will apply to all awarded loans.
On March 9, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $117.872 billion Total propositions accepted: $117.872 billion Bid/cover ratio: 0.79 Number of bidders: 116 The awarded loans will settle on March 12, 2009, and will mature on April 9, 2009. The stop-out rate shown above will apply to all awarded loans.
On March 23, 2009, the Federal Reserve conducted an auction of $150 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $101.642 billion Total propositions accepted: $101.642 billion Bid/cover ratio: 0.68 Number of bidders: 103 The awarded loans will settle on March 26, 2009, and will mature on June 18, 2009. The stop-out rate shown above will apply to all awarded loans.
On April 6, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $106.251 billion Total propositions accepted: $106.251 billion Bid/cover ratio: 0.71 Number of bidders: 105 The awarded loans will settle on April 9, 2009, and will mature on May 7, 2009. The stop-out rate shown above will apply to all awarded loans.
On April 20, 2009, the Federal Reserve conducted an auction of $150 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $83.830 billion Total propositions accepted: $83.830 billion Bid/cover ratio: 0.56 Number of bidders: 98 The awarded loans will settle on April 23, 2009, and will mature on July 16, 2009. The stop-out rate shown above will apply to all awarded loans.
On May 4, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $131.562 billion Total propositions accepted: $131.562 billion Bid/cover ratio: 0.88 Number of bidders: 124 The awarded loans will settle on May 7, 2009, and will mature on June 4, 2009. The stop-out rate shown above will apply to all awarded loans.
On May 18, 2009, the Federal Reserve conducted an auction of $150 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $55.570 billion Total propositions accepted: $55.570 billion Bid/cover ratio: 0.37 Number of bidders: 96 The awarded loans will settle on May 21, 2009, and will mature on August 13, 2009. The stop-out rate shown above will apply to all awarded loans.
On June 1, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $95.588 billion Total propositions accepted: $95.588 billion Bid/cover ratio: 0.64 Number of bidders: 103 The awarded loans will settle on June 4, 2009, and will mature on July 2, 2009. The stop-out rate shown above will apply to all awarded loans.
On June 15, 2009, the Federal Reserve conducted an auction of $150 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $48.023 billion Total propositions accepted: $48.023 billion Bid/cover ratio: 0.32 Number of bidders: 97 The awarded loans will settle on June 18, 2009, and will mature on September 10, 2009. The stop-out rate shown above will apply to all awarded loans.
On June 29, 2009, the Federal Reserve conducted an auction of $150 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $86.337 billion Total propositions accepted: $86.337 billion Bid/cover ratio: 0.58 Number of bidders: 106 The awarded loans will settle on July 2, 2009, and will mature on July 30, 2009. The stop-out rate shown above will apply to all awarded loans.
On July 13, 2009, the Federal Reserve conducted an auction of $125 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $47.768 billion Total propositions accepted: $47.768 billion Bid/cover ratio: 0.38 Number of bidders: 87 The awarded loans will settle on July 16, 2009, and will mature on October 8, 2009. The stop-out rate shown above will apply to all awarded loans.
On July 27, 2009, the Federal Reserve conducted an auction of $125 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $82.375 billion Total propositions accepted: $82.375 billion Bid/cover ratio: 0.66 Number of bidders: 103 The awarded loans will settle on July 30, 2009, and will mature on August 27, 2009. The stop-out rate shown above will apply to all awarded loans.
On August 10, 2009, the Federal Reserve conducted an auction of $100 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $42.941 billion Total propositions accepted: $42.941 billion Bid/cover ratio: 0.43 Number of bidders: 91 The awarded loans will settle on August 13, 2009, and will mature on November 5, 2009. The stop-out rate shown above will apply to all awarded loans.
On August 24, 2009, the Federal Reserve conducted an auction of $100 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $73.404 billion Total propositions accepted: $73.404 billion Bid/cover ratio: 0.73 Number of bidders: 97 The awarded loans will settle on August 27, 2009, and will mature on September 24, 2009. The stop-out rate shown above will apply to all awarded loans.
On September 8, 2009, the Federal Reserve conducted an auction of $75 billion in 84-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $31.908 billion Total propositions accepted: $31.908 billion Bid/cover ratio: 0.43 Number of bidders: 75 The awarded loans will settle on September 10, 2009, and will mature on December 3, 2009. The stop-out rate shown above will apply to all awarded loans.
On September 21, 2009, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $55.763 billion Total propositions accepted: $55.763 billion Bid/cover ratio: 0.74 Number of bidders: 83 The awarded loans will settle on September 24, 2009, and will mature on October 22, 2009. The stop-out rate shown above will apply to all awarded loans.
On October 5, 2009, the Federal Reserve conducted an auction of $50 billion in 70-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $24.830 billion Total propositions accepted: $24.830 billion Bid/cover ratio: 0.50 Number of bidders: 75 The awarded loans will settle on October 8, 2009, and will mature on December 17, 2009. The stop-out rate shown above will apply to all awarded loans.
On October 19, 2009, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $39.566 billion Total propositions accepted: $39.566 billion Bid/cover ratio: 0.53 Number of bidders: 83 The awarded loans will settle on October 22, 2009, and will mature on November 19, 2009. The stop-out rate shown above will apply to all awarded loans.
On November 2, 2009, the Federal Reserve conducted an auction of $25 billion in 70-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $13.152 billion Total propositions accepted: $13.152 billion Bid/cover ratio: 0.53 Number of bidders: 53 The awarded loans will settle on November 5, 2009, and will mature on January 14, 2010. The stop-out rate shown above will apply to all awarded loans.
On November 16, 2009, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $31.119 billion Total propositions accepted: $31.119 billion Bid/cover ratio: 0.41 Number of bidders: 82 The awarded loans will settle on November 19, 2009, and will mature on December 17, 2009. The stop-out rate shown above will apply to all awarded loans.
On November 30, 2009, the Federal Reserve conducted an auction of $25 billion in 42-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 0.250 percent Total propositions submitted: $16.730 billion Total propositions accepted: $16.730 billion Bid/cover ratio: 0.67 Number of bidders: 49 The awarded loans will settle on December 3, 2009, and will mature on January 14, 2010. The stop-out rate shown above will apply to all awarded loans.
Source notes:
- Wikipedia. Term Auction Facility. http://en.wikipedia.org/wiki/Term_auction_facility Accessed 12/01/09 [↩]
- Olivier Armantier, Sandra Krieger, and James McAndrews. Current Issues in Economics and Finance, Vol. 14, No. 5. New York Federal Reserve. July 2008 [↩]
- Ibid. [↩]
- Ibid. [↩]
- Federal Reserve. FRB: Frequently asked questions (revised January 12, 2009). http://www.federalreserve.gov/monetarypolicy/taffaq.htm Accessed 12/01/09 [↩]
- Federal Reserve. FRB: Term Auction Facility. http://www.federalreserve.gov/monetarypolicy/taf.htm December 1, 2009 [↩]
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