What Is the Term Securities Lending Facility (TSLF)?
The Term Securities Lending Facility (TSLF) originated as a weekly lending facility through the Federal Reserve Bank that allowed 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 review for downgrade, municipal securities, investment-grade corporate securities, and all securities available for tri-party repurchase agreements.
- The Term Securities Lending Facility (TSLF) enabled primary dealers to borrow on a 28-day term United States Treasury securities by pledging eligible collateral.
- The Federal Reserve created the TSLF in March 2008 in order to relieve liquidity pressure in the credit markets.
- Eligible collateral included investment-grade corporate securities, municipal securities, and AAA- to Aaa-rated mortgage-backed securities not under review for downgrade.
- Dealers submitted competitive bids in order to borrow from the Federal Reserve's system open market account a basket of Treasury securities, such as Treasury bills, bonds, notes, and inflation-indexed securities.
- The Federal Reserve also created a TSLF Options Program (TOP) that gave primary dealers the right to draw upon a TSLF loan at a specific date in the future in exchange for eligible collateral.
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 weekly auctions in which dealers submitted competitive bids for the basket of Treasury securities in $10 million increments. At the Federal Reserve's discretion, primary dealers were allowed 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 conducted its first auction on March 27, 2008. The TSLF closed on February 1, 2010.
The Term Asset-Backed Securities Loan Facility (TALF) is another program created 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)
Created on March 11, 2008, the TSLF was intended to ease the credit market for Treasury securities without affecting currency or manipulating security prices. The Federal Reserve initially pledged $200 billion to this facility in an attempt to relieve liquidity pressure in the credit markets, specifically the mortgage-backed securities market.
By creating this facility, primary dealers including Fannie Mae, Freddie Mac, and major banks could access highly liquid and secure Treasury securities in exchange for far less liquid and less safe eligible securities. An asset's liquidity refers to the ease with which that asset can be converted from an investment into cash. The TSLF helped to increase the liquidity in the credit market for mortgage-backed securities.
The facility was a bond-for-bond lending alternative to the Term Auction Facility (TAF), a cash-for-bond program that injects cash directly into the market. Direct injection of money can affect the federal funds rate and have a negative impact on the value of the dollar.
The TSLF was also an alternative to direct purchases of the mortgaged investments, which goes against the Federal Reserve's aim to avoid directly affecting security prices.
According to the Congressional Research Service, over the life of the program, the TSLF experienced no losses and earned an income of $781 million.
TSLF Options Program
The Federal Reserve created the TSLF Options Program (TOP) In July 2008. During periods of increased pressure in the collateral markets, TOP offered additional liquidity. With TOP auctioned options, primary dealers had the right, but not the obligation, to draw upon a TSLF loan at a specific date in the future in exchange for eligible collateral. The Federal Reserve ended TOP in Oct. 2009.
Financial researchers discovered a strong negative correlation between using the TSLF or acquiring funds from other bailout programs, including the Troubled Asset Relief Program, or TARP, during 2008 and 2009. This difference indicates that the credit issued to these dealers by the TSLF prevented the dealers from needing other bailouts. The researchers found that dealers with more highly-paid CEOs were more likely to borrow during the next TSLF auction cycle than those dealers with lower-paid CEOs.