The Federal Reserve (Fed), on July 30, in conjunction with the European Central Bank (ECB) and the Swiss National Bank (SNB), announced several steps to enhance the effectiveness of its existing liquidity facilities. These actions are described in more detail below:
Extension of the PDCF and TSLF
In light of "continued fragile circumstances in financial markets,” the Fed extended the Primary Dealer Credit Facility (PDCF) through January 30, 2009, and the Fed and the Federal Open Market Committee (FOMC) have extended the Term Securities Lending Facility (TSLF) through that same date. These facilities would be withdrawn should the Fed determine that conditions in financial markets are no longer "unusual and exigent." The PDCF provides discount window loans to primary dealers, collateralized by investment-grade securities. The interest rate charged is the primary credit rate (discount rate) of the Federal Reserve Bank of New York (FRB of NY). Under the TSLF, the FRB of NY conducts weekly auctions of 28-day loans of Treasury securities to primary dealers. Loans under the TSLF are collateralized by a range of government and private securities.
Auctions of TSLF Options
The FOMC has authorized the FRB of NY to auction options for primary dealers to borrow Treasury securities from the TSLF. Such options will be offered for exercise in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends. Under the options program, up to $50 billion of draws on the TSLF using options may be outstanding at any time. This amount is in addition to the $200 billion of Treasury securities that may be offered through the regular TSLF auctions. Draws on the TSLF through exercise of these options may be collateralized by the full range of TSLF Schedule 2 collateral.
Eighty-four-day Term Auction Facility Loans
Beginning on August 11, 84-day Term Auction Facility (TAF) loans will be auctioned as well as 28-day TAF funds. Specifically, bi-weekly auctions will be conducted, alternating between auctions of $75 billion of 28-day credit and auctions of $25 billion of 84-day credit. Currently, the Fed auctions $75 billion of 28-day funds every two weeks. During a transition period, the amount of 28-day credit being auctioned will be reduced to keep the amount of TAF credit outstanding at $150 billion. A schedule of TAF auctions and applicable terms and conditions can be found at the Federal Reserve website.
Increase in Swap Line with European Central Bank
The ECB and the SNB will also make 84-day funds, as well as 28-day funds, available at their dollar auctions. The FOMC has authorized an increase in its dollar swap line with the ECB in order to accommodate a temporary increase in the ECB’s dollar auctions as the ECB shifts some of its auctions to 84-day terms. The size of the SNB’s swap line remains at $12 billion. These swap lines are authorized through January 30, 2009. See the ECB website and the SNB website.