About the TAP Issue Program

The TAP Issue Program was launched on July 6, 1999 as a refinement to the FHLBank bullet bond auction process. Rather than frequently bringing numerous small bullet issues of similar maturities to market, the TAP Issue Program aggregates the most common maturities (2-, 3-, 5-, 7-, and 10-year) by reopening them over a three-month period. As a result, most "on-the-run" issues grow throughout the cycle. TAP Issues generally remain open for three months, after which they are closed and a new series of TAP Issues is opened to replace them. If market conditions permit, previous TAP Issues that have rolled down the curve may be reopened as the new cycle's "on-the-run" issue.  This Program has reduced the number of separate bullet bonds issued, but more importantly, has enhanced market awareness through increased issue size, secondary market activity, and utility, while providing enhanced funding diversification for the FHLBanks. This predictable and structured auction process has also improved liquidity and stimulated demand from investors and dealers seeking high-quality Agency paper. With this Program now over ten years old, it is clear that investors recognize the value of incremental issuance. As with all FHLBank debt, TAP Issues are rated by Moody's (Aaa) and S&P (AA+), receive a 20% BIS risk-weighting in most countries, and are joint and several obligations of all 12 FHLBanks.

Based on historical bullet data, it was expected that the TAP Issue Program would substantially increase the average size of the on-the-run issues. Data show that the most popular TAP Issues always reach multi-billion dollar size, providing benefits for investors and dealers while creating a valuable new funding source for the FHLBank System. Measured by size, the best results have been recorded by the two- and three-year TAP Issues. Compared to the combined pre-Program total, these issues have grown (on average) considerably larger per cycle than previously seen.

General Characteristics of TAP Issues
TAP Issues follow 3-month quarters, which closely correspond to the trading of quarterly on-the-run Treasury issues and are sold through competitive electronic auction. The FHLBanks may also reopen TAPs from prior cycles as they roll down the curve, further increasing both size and liquidity. TAPs have semiannual coupon payment dates on February 15 and August 15 or May 15 and November 15 that coincide with Treasury issues. Depending on the original settlement date, the first coupon period can be either long or short - maturity dates will be shortened if the 15th is not a good business day. The FHLBanks may issue other TAP maturities from 12 months to 30 years (in addition to the four on-the-run issues). These have the same standardized features as on-the-run TAPs, but are known as off-the-run TAP Issues. A list of current outstanding TAP Issues is updated monthly on the TAP Issue List page of this section. This and other TAP data may be obtained through proprietary services such as Bloomberg, Dow Jones, ThomsonReuters, and TradeWeb.

TAP Issue Program Details

Issuance Periods (Trade Dates)     Corresponding Semiannual Coupon Dates
May 1 - July 31     May 15 and November 15
August 1 - October 31     February 15 and August 15
November 1 - January 31     May 15 and November 15
February 1 - April 30     February 15 and August 15

Coupon
TAP coupons are rounded down to the nearest 1/8% from the weighted average yield of the first auction of the Program cycle.

Clearing Agent
Fed Book-Entry. The beneficial interests in the bonds can be issued, held and transferred among the Fedwire, Euroclear and Clearstream, either directly or indirectly through custodians and depositories.

Settlement
Normally two business days.

Auction Methodology
TAP Issues are only issued via auction. Up to eight structures may be bid at one time. Dealers will submit all-in spread bids in 1/10s of a basis point for both new issues and reopenings. Bonds will be awarded at a dollar price with zero concession based on a basis point spread to Treasuries. On-the-run Treasuries will be the benchmark for current 2- and 5-year on-the-run TAP Issues and an interpolated curve will be used for 3- and 7-year, and most off-the-run TAP Issues. Maturities of less than two years (including the 1-year, 15-month, 1.5-year and 21-month) will be benchmarked against the current on-the-run 2-year Treasury.

Dealers will submit auction indications and bids through the electronic auction platform. OF will collect bids electronically, determine Treasury benchmark yield levels, calculate winners, and then electronically announce winning dealer allocations. Dealers will need to monitor the electronic auction to determine auction awards for amounts and prices. OF determination of Treasury benchmark yield levels will be final and binding.

Daily Auction Schedule

10:00-25 a.m. ET - OF solicits indications from Bidding Group
10:30 - Indications on current TAP Issues released
10:50 - Close of Bank commitments
11:00 - Announcement of bid details to market
11:30 - Dealer bid deadline
11:32-35 - Confirm Dealer awards

Auction Announcement
Dealers in the TAP Bidding Group are expected to monitor the electronic auction site for TAP announcements at 11:00 a.m. ET. In addition, individual dealer notification will be sent via email. Auction announcements and results are posted on the Office of Finance website. All bids are due by 11:30 a.m. OF is under no obligation to accept and may reject any bids submitted after this time.

Minimum Bid
Dealers must submit minimum bids of $25 million or the entire bid size if less than $25 million. Partial bids and multiple bids will be accepted. Bids above the minimum must be in increments of $5 million unless an odd amount is needed to equal the total amount available. The total of each dealer's bids for an individual structure is limited by the total amount available for that structure.

Winners Tiebreaker Algorithm
To reward dealers that bid the lowest overall cost of funds for the System, ties will be broken by first giving preference to dealers that are already buying bonds from the narrowest spread to the widest spread accepted and second by the amount each dealer bid at the tied spread. Bonds are awarded as follows:

  1. Bonds will first be awarded to the narrowest spread in 1/10s of a basis point
  2. If two or more bids are tied, bonds will first be awarded to the dealer(s) already awarded bonds from the narrowest spread to the widest spread accepted
  3. If two or more dealers that are tied have already been awarded bonds at the same spread, bonds will first be awarded to the dealer that bid for the largest amount of bonds at that spread
  4. Bonds will be awarded next to the dealer(s) that bid for the largest amount at the tied spread
  5. If still tied, a winner will be chosen by random selection
The example below demonstrates a hypothetical allocation of dealer bids in an auction for $100 million of bonds. Dealer A would first buy bonds at +26 since it already won bonds at a narrower spread. Dealer C would buy bonds since its bid was larger than that of Dealer B at the same spread. Dealer B would be next in line for an award if all bonds had not already been entirely awarded.

Dealer     Spread     Bid Amount     Awarded Amount
A           +25            $25 mm      1st $25 mm
A               +26            $25 mm 2nd $25 mm
B               +26            $25 mm      zero
C               +26            $50 mm 3rd $50 mm

Bidding
Dealers that are part of the TAP Bidding Group may participate in TAP auctions. Composition of this group is evaluated on a quarterly basis. Members are expected to bid on all new and reopened issues. Retention in the TAP Bidding Group will be determined primarily by the par value of TAP bids won. In cases where several dealers' underwriting performance may be similar, the following factors will also be considered:
  1. Par value of the cover bid
  2. Percentage of bids received for all issues
  3. Percentage of days when 3:00 p.m. ET daily spread prices received
  4. Percentage of auction indications received

Original Issue Discount (OID) Regulations

IRS regulations for reopenings and OID are summarized as follows:

  • Reopenings that settle within 13 calendar days of original issue date (original settlement) will not create OID regardless of price or yield
  • Reopenings that have a weighted-average price greater than par minus the quantity of 0.25 times the number of full years remaining to maturity will not create OID. A one-quarter-point-per-year discount is considered to be de minimus for OID purposes
  • Reopenings that settle within six months of the original issue date with a weighted-average yield equal to or less than 110% of the original coupon (or yield, whichever is lower) will not create OID
  • If announcement is within seven calendar days or less of pricing, the yield test may be applied on the announcement day

Office of Finance OID procedures:

  • If early in a 3-month TAP period, reopening the current on-the-run TAP Issue would cause it to trade at OID levels, OF would auction a new TAP Issue with an identical maturity and an at-market coupon
  • For on-the-run issues trading at OID levels late in TAP quarters, instead of auctioning a new TAP Issue with an identical maturity, OF may choose to launch the on-the-run TAP Issue for the next quarter. In the example above, if in late April the 2-year TAP Issue maturing 5/14/04 trades OID, OF may auction a 8/13/04 TAP Issue
  • There is the potential for market conditions to change during an auction process. If the market moves such that an issue already announced would trade OID, that issue would not trade and the FHLBanks would immediately rebid a new issue

TAP Issue Bloomberg Description
After each TAP auction, the winning dealer(s) will report the amounts of such reopened issues to Bloomberg so that the correct size for all issues can be updated on the Bloomberg System.

Amount Traded
Banks have the option to accept or reject all or partial bids based on market conditions. OF makes all determinations and all determinations are final.

Policies and Procedures
All policies and procedures are subject to change or suspension by the FHLBanks at any time in their sole and absolute discretion.

For additional information please contact the Office of Finance at 703-467-3600 or info@fhlb-of.com.