Term Securities Lending Facility (TSLF)

What Is the Term Securities Lending Facility (TSLF)?

The Term Securities Lending Facility (TSLF) started as a week by week lending facility through the Federal Reserve Bank that permitted primary dealers to borrow U.S. Treasury securities on a 28-day term by pledging eligible collateral.

The eligible securities under the TSLF included AAA-to Aaa-rated mortgage-backed securities (MBS) not under audit for downgrade, municipal securities, investment-grade corporate securities, and all securities accessible for tri-party repurchase agreements.

Understanding the Term Securities Lending Facility (TSLF)

The Term Securities Lending Facility (TSLF) was operated by the Federal Reserve's open market trading desk. The TSLF offered primary dealers securities held by the System Open Market Account (SOMA) for loans against eligible collateral. The TSLF held week after week auctions in which dealers submitted competitive offers for the basket of Treasury securities in $10 million additions. At the Federal Reserve's carefulness, primary dealers were permitted to borrow up to 20% of the announced offering amount.

In exchange for collateral, the primary dealers received a basket of Treasury general collateral, which included Treasury bills, notes, bonds, and inflation-indexed securities from the Federal Reserve's system open market account. The TSLF opened on March 11, 2008, and led its most memorable auction on March 27, 2008. The TSLF closed on February 1, 2010.

The Term Asset-Backed Securities Loan Facility (TALF) is one more program made by the U.S. Federal Reserve during the 2008 financial crisis. This program increased banks' liquidity and the availability of consumer credit.

History of the Term Securities Lending Facility (TSLF)

Made on March 11, 2008, the TSLF was intended to facilitate the credit market for Treasury securities without influencing currency or controlling security prices. The Federal Reserve initially pledged $200 billion to this facility trying to assuage liquidity pressure in the credit markets, specifically the mortgage-backed securities market.

By making this facility, primary dealers including Fannie Mae, Freddie Mac, and major banks could access exceptionally liquid and secure Treasury securities in exchange for undeniably less liquid and less safe eligible securities. An asset's liquidity alludes to the straightforwardness with which that asset can be changed over from an investment into cash. The TSLF assisted with expanding the liquidity in the credit market for mortgage-backed securities.

The facility was a security for-security lending alternative to the Term Auction Facility (TAF), a cash-for-security program that infuses cash directly into the market. Direct injection of money can influence the federal funds rate and adversely affect the value of the dollar.

The TSLF was likewise an alternative to direct purchases of the mortgaged investments, which conflicts with the Federal Reserve's aim to try not to directly influence security prices.

As indicated by the Congressional Research Service, over the life of the program, the TSLF encountered no losses and earned an income of $781 million.

TSLF Options Program

The Federal Reserve made the TSLF Options Program (TOP) In July 2008. During periods of increased pressure in the collateral markets, TOP offered extra liquidity. With TOP auctioned options, primary dealers had the right, yet not the obligation, to draw upon a TSLF loan at a specific date later on in exchange for eligible collateral. The Federal Reserve ended TOP in Oct. 2009.

Special Considerations

Financial researchers found a strong negative correlation between utilizing the TSLF or gaining funds from other bailout programs, including the Troubled Asset Relief Program, or TARP, during 2008 and 2009. This distinction shows that the credit issued to these dealers by the TSLF kept the dealers from requiring other bailouts. The researchers found that dealers with all the more generously compensated CEOs were bound to borrow during the next TSLF auction cycle than those dealers with lower-paid CEOs.

Features

• Eligible collateral included investment-grade corporate securities, municipal securities, and AAA-to Aaa-rated mortgage-backed securities not under audit for downgrade.
• The Term Securities Lending Facility (TSLF) empowered primary dealers to borrow on a 28-day term United States Treasury securities by pledging eligible collateral.
• The Federal Reserve likewise made a TSLF Options Program (TOP) that gave primary dealers the right to draw upon a TSLF loan at a specific date later on in exchange for eligible collateral.
• The Federal Reserve made the TSLF in March 2008 to alleviate liquidity pressure in the credit markets.
• Dealers submitted competitive offers to borrow from the Federal Reserve's system open market account a basket of Treasury securities, for example, Treasury bills, bonds, notes, and inflation-indexed securities.