The Federal Reserve Board has today announced an expansion of the asset classes eligible under the Term Securities Lending Facility (TSLF). The board said that triple-A-rated ABS will be eligible as schedule II collateral starting with the May 7 auction.
Aside from this, the board said that the size of the Term Auction Facility (TAF) auctions has been increased to $75 billion. Currency swap lines to foreign central banks have also been increased as well.
In a research note released by RBS Greenwich Capital, analysts said that there are three points to make about the Fed's TAF changes.
The first is that the Libor issues are easier for the Fed to address compared with some of the other issues that prevailed in the market in 1Q08. According to RBSGC, it is much easier for the Fed to flood the banking system with liquidity instead of convincing investors that it's alright to purchase junk bonds or mortgage paper. This is why RBSGC analysts believe that the Fed will "eventually get the Libor situation resolved."
This announcement also offers a lot of extra liquidity, although it might be slightly disappointing because there was a widespread expectation in the market that the Fed would extend the term of at least some TAF auctions to three months, according to RBSGC. However, the Fed has chosen to stick with one-month auctions and is seems to be more focused on quantity rather than term, RBSGC said.
This is also an additional $76 billion in liquidity that the Fed will have to offset, probably via selling Treasurys into the market. Since the Fed no longer even owns that many bills, RBSGC said this would imply more selling of coupon securities, which is something that had been temporarily stopped after the "flurry of activity in March and early April."
In related news, last April 2, the American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) jointly submitted a letter to the Federal Reserve Board as well as the Federal Reserve Bank of New York asking that the definition of program-eligible collateral for the TSLF be expanded to include triple-A rated FFELP and private student loan ABS.
The ASF had initiated this request because of the limited credit risk found in triple-A rated government guaranteed and private SLABS. The association also advocated for the appropriate balance between managing federal government risk exposure and meeting the urgent need for added liquidity sources for funding student loan originations, the ASF said in a release sent out this morning.