Tuesday, March 3, 2009
Some QA regarding TALF
How will the TALF work? Under the TALF, the Federal Reserve Bank of New York (FRBNY) will provide non-recourse funding to any eligible borrower owning eligible collateral. On a fixed day each month, borrowers will be able to request one or more three-year TALF loans. Loan proceeds will be disbursed to the borrower, contingent on receipt by the FRBNY’s custodian bank (custodian) of the eligible collateral, an administrative fee, and margin, if applicable. As the loan is non-recourse, if the borrower does not repay the loan, the FRBNY will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets. The FRBNY has published a Master Loan and Security Agreement (MLSA), which provides further details on the terms that will apply to borrowings under the TALF. The TALF loan is non-recourse except for breaches How does an entity participate in the TALF program? An eligible borrower must be a customer of a primary dealer and must have executed a customer agreement authorizing the primary dealer, among other things, to execute the master loan and security agreement (MLSA) as agent for the borrower and to perform all actions required on their behalf. The MLSA will provide further details on the requirements that will apply to the entities seeking to borrow from the FRBNY under the TALF. What is the TALF process from subscription to settlement? Prior to each subscription date, each primary dealer will collect from prospective eligible borrowers the amount of each borrower’s loan request(s), the interest rate format corresponding to the type of collateral pledged (that is, fixed or floating), the CUSIPs of the ABS the borrower expects to deliver and pledge to the FRBNY, and the prospectuses and/or offering documents of the ABS expected to be pledged. On the subscription date, each primary dealer will submit this information to the FRBNY’s custodial agent for review and will also submit to the FRBNY the aggregate loans request amount for all its customers by rate type and asset class. No fewer than two business days before the loan settlement date, the custodian will send a confirmation to the primary dealer listing each borrower’s loan amount and the ABS expected to be delivered on the loan settlement date. The confirmation will also include the administrative fee and margin (the dollar amount of the haircut), if applicable, to be collected by the primary dealer and paid on the loan settlement date. On the loan settlement date, the borrower or its agent will deliver against payment the ABS collateral, administrative fee and applicable margin to the FRBNY’s settlement account at the custodian. Haircuts and Rates To what values will the haircuts be applied to determine the maximum loan amount?Under the TALF, the FRBNY will lend to each borrower an amount equal to the lesser of the par or market value of the pledged ABS minus a haircut. Alternatively, when the pledged ABS has a market value above par, the FRBNY will lend an amount equal to the market value -- subject to a cap of 110 percent of par value -- minus a haircut, and the borrower will periodically prepay a portion of the loan. The prepayments will be calculated to adjust for the expected reversion of market value toward par value as the ABS matures.