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-, and 7-year) by reopening them over a three-month period. As a result, these “on-the-run” issues grow to $1 billion - $3.5 billion in each 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. 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 over $335 billion in sales since program inception, it is clear that investors recognize the value of incremental issuance. As with all FHLBank debt, TAP Issues carry the highest credit ratings from Moody’s and S&P, 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. The 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.
After nine years of sales experience, it is clear that all but the longest TAP maturities exceeded earlier sales predictions by significant margins. 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. These statistics are a continuing vote of confidence for the Program.
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 daily in the TAP Issue Program section of this web site. This and other TAP data may be obtained through proprietary services such as Bloomberg, Dow Jones, Reuters, and TradeWeb.
Market Reaction to the TAP Issue Program
The Program was introduced during a period of less than optimum market conditions. The July 1999 launch occured during a period where spreads of all fixed-income instruments were widening. At the same time, interest rates were rising, compounding challenges for issuers. Nonetheless, after just nine trading days, TAP Issue sales had grown to over $1.9 billion while creating a current yield curve for 2- through 10-year maturities. At the end of the first cycle, total Program sales exceeded $14.3 billion, with the 2- and 3-year TAPs reaching nearly $3.5 billion each. Since that time, investor appetite for simple, liquid bullets has remained strong. With the inclusion of 1-year maturities, each TAP cycle has averaged about $10 billion, and has created numerous multi-billion dollar issues. Aggregating smaller bullet auctions into the TAP Issue Program has resulted in on-the-run issues being included in all major bond indices. Since inception, over $335 billion in TAP sales have been recorded, and awards could exceed $45 billion in 2008. The FHLBanks will continue to improve the TAP product in response to the market.
Participation from our bidding group of securities firms, currently composed of 19 members, has been aggressive. Dealers appreciate the standardized features and market-clearing incremental supply, as well as the liquidity inherent in multi-billion dollar issues. Dealers also report that investors are very interested in TAPs as a high-quality addition to fixed-income portfolios. Apart from the obvious benefits of Triple-A rated FHLBank debt, investors can continuously monitor the value of their holdings, as daily auctions determine current market-clearing yields in the TAP Issuance Statistics section of this web site. Current TAP coupons range from 2.75% to 5.125%, which traditionally represent a 0.25% to 1.00% yield boost over comparable Treasury securities. Interest on TAP issues, and all FHLBank debt securities, is exempt from state and local income tax. For investors, this exemption can increase the yield from, for example, 5.125% to over 5.6%, depending on the marginal tax rates in the particular investor's state of residence.
Secondary market activity has continued to increase as the benefits of TAPs become well known. While many TAP Issues have traded at spreads equal to and through other comparable GSE issues, there is generally a positive roll to the newly created issues at the beginning of each new cycle. Their popularity assures that FHLBank securities will represent a large share in major fixed-income indices. Also, the pricing indications reported daily on this web site have created a reliable bullet matrix for all to use.
TAP Issue Program Details
| Issuance Periods (Trade Dates) | Corresponding Semiannual Coupon Dates |
| May 1 - July 31 August 1 - October 31 November 1 - January 31 February 1 - April 30 |
May 15 and November 15 February 15 and August 15 May 15 and November 15 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 Bookentry. 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 2 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. 1-, 1 ¼-, 1
½-, and 1 ¾-year issues 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
|
OF solicits indications from Bidding Group Indications on current TAP Issues released Close of Bank commitments Announcement of bid details to market Dealer bid deadline Confirm Dealer awards |
10:00-25 AM (ET)
10:30 10:50 11:00 11:30 11:32-35 |
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 also posted on fhlb-of.com. 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 dealer(s) 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 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 | 1 st $25 mm |
| A | +26 | $25 mm | 2 nd $25 mm |
| B | +26 | $25 mm | zero |
| C | +26 | $50 mm | 3 rd $50 mm |
OID Regulations
IRS regulations for reopenings and original issue discount (OID) are summarized as follows: If early in a 3-month TAP period, a current on-the-run TAP Issue trades at a level that would create
OID if reopened, OF would start a new TAP Issue with an identical maturity, but with 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 begin 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 with OID, that issue would not trade and
the FHLBanks would immediately rebid a new issue. Miscellaneous
TAPS 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 or to request brochures (hard copy or electronic), please contact the Office of Finance at 703-467-3600 or info@fhlb-of.com).