TFF Operational Notes

1. Introduction

The Term Funding Facility to Support Lending to Australian Businesses (TFF) was announced on 19 March 2020 as part of a package of measures to support the Australian economy. Under the TFF, the Reserve Bank offers three-year funding to authorised deposit-taking institutions (ADIs) through repurchase transactions. The TFF was amended in September and November 2020 to provide further support (see Market Announcements for 1 September 2020 and 3 November 2020). Prior to the November 2020 Board meeting, TFF funding was provided at a fixed pricing rate of 25 basis points per annum. From 4 November 2020 onwards, new TFF funding is provided at a fixed pricing rate of 10 basis points per annum.

The TFF has two objectives:

1. to reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of ADIs and in turn helping to reduce interest rates for borrowers. It will complement the reduction in funding costs from the Reserve Bank's target for three-year Australian Government bond yields; and
2. to encourage ADIs to support businesses during a difficult period, ADIs will have access to additional low-cost funding if they expand their lending to businesses over the period ahead. The scheme encourages lending to all businesses, although the incentives are stronger for small and medium-sized enterprises (SMEs).

2. Status of the TFF Operational Notes

These TFF Operational Notes are published by the Reserve Bank as a guideline only. They are intended to assist ADIs to better understand how the TFF will operate in practice. They are only legally binding to the extent that they are specifically referred to in the Reserve Bank Information and Transfer System (RITS) Regulations (in particular, Annexure F of the RITS Regulations).

The TFF Operational Notes do not constitute an offer, undertaking or intention by the RBA to create legal relations or to enter into any agreement.

In the context of the RITS Regulations, all repurchase transactions entered into under the Reserve Bank's TFF are known as TFF Repos, and are distinguished from repurchase transactions entered into by the Reserve Bank in its Open Market Operations (OMO repos), Standing Facilities (SF repos), Foreign Currency Repos and Securities Lending Repos.

The Reserve Bank may make additions, modifications or amendments to these TFF Operational Notes at any time by updating the relevant page on the Reserve Bank's website. A register of past amendments can be found on the TFF Notifications webpage.

3. Counterparty Eligibility

All ADIs that extend credit are eligible to participate in the TFF.

In order to access the scheme, ADIs must have the capacity to deliver eligible collateral to the RBA. To do this, ADIs must satisfy the criteria for counterparty eligibility for the Reserve Bank's domestic market operations, which are published on the Reserve Bank's website: Eligible Counterparties. This includes being members of RITS and Austraclear. The small number of ADIs that do not currently satisfy these two eligibility criteria can apply to become eligible counterparties by becoming members of RITS and Austraclear (see RITS membership and Austraclear or contact the TFF at RBATFF@rba.gov.au for more information).

Eligibility and continued access to the TFF will also be dependent upon ADIs acting, in the opinion of the Reserve Bank, in good faith and in a manner consistent with the objectives of the TFF.

4. Eligible Collateral

4.1 Eligible Securities

As part of a request to enter into a TFF Repo, the ADI must nominate ‘Eligible Securities’ that it wishes to sell to the Reserve Bank under repo. Eligible securities consist of all securities currently eligible for the Reserve Bank's domestic market operations. The details on what securities the RBA considers to be ‘Eligible Securities’ are available on the Reserve Bank website: Eligible Securities. If an institution would like to use securities for TFF Repo that meet the eligibility requirements but are not on the current list of eligible securities, then the ADI can submit an Eligible Security Application Form to eligible_securities@rba.gov.au for assessment. There are no diversification requirements for the collateral. To help minimise processing times for TFF Repo requests, the RBA prefers that institutions minimise the number of lines of collateral for each TFF Repo and use collateral that has a longer tenor than the term of the TFF Repo.

The Reserve Bank does not typically purchase a security from an ADI under repo that is deemed to be materially related to the credit quality of that security. However, self-securitisations – which are not sold to investors, but are instead held entirely by the originating ADI for use as collateral in the Reserve Bank's market operations – are eligible for use as collateral in TFF Repos. Institutions are not required to apply for a related-party exemption to use self-securitisations as collateral for TFF Repos; such exemptions will automatically be granted by the Reserve Bank's Risk and Compliance Department. Any queries relating to the eligibility of collateral should be directed to the Reserve Bank's Risk and Compliance Department at eligible_securities@rba.gov.au.

4.2 Margin Ratios

When Eligible Securities are purchased by the Reserve Bank under a TFF Repo, the Reserve Bank will apply a margin ratio in order to obtain the ‘purchase price’ for the securities (see Margin Ratios for more details). The margin ratios applicable to TFF Repos are the same as applied to other repos conducted with the Reserve Bank as part of its domestic market operations.

Margin calls will be made on TFF Repos as set out in Margin Maintenance and Substitutions on Repurchase Agreements.

Margin calls on a TFF Repo where the Reserve Bank has purchased self-securitisations may occur because of the pass through of principal payments from the underlying loans to the securities issued by the trust (i.e. a reduction in the bond factor) and/or changes in the margin ratio of the security. These may vary over time depending on the structure of the self-securitisation trust (whether it is revolving or amortising), the provider of the collections account, and the level of loan repayment (see Margin Ratios for more details). To maintain the value of the self-securitisation, counterparties can regularly sell more mortgages into the self-securitisation.

4.3 Valuation

In March 2020, the RBA froze self-securitisation prices for three years using modelled prices calculated as at 3 February 2020. From 27 March 2023, each self-securitisation will be priced daily using the methodology set out in Valuing Asset-Backed Securities Without Observed Market Prices.

All other securities are re-valued each day using market prices. The value of all asset backed securities will continue to vary where the bond factor of the security changes.

4.4 Substitutions

The Reserve Bank endeavours to meet reasonable requests from counterparties to return to them securities that the Reserve Bank holds under an existing TFF Repo and receive replacement securities, particularly if securities are due to mature prior to the expiry of the repo. The Reserve Bank is under no obligation to enter into such exchanges. Without limitation, the Reserve Bank may decline to meet requests for collateral substitutions where counterparties are requesting a high volume of substitutions.

The cut-off time for notification of a proposed substitution on a TFF Repo contracted in the Reserve Bank's TFF is 12.00 pm (AEST/AEDT) on the day that the substitution is to take place. However, the Reserve Bank may consider requests after this time at its discretion.

The counterparty should contact the Reserve Bank's Domestic Markets department at Dealingroom@rba.gov.au with details of the securities that it wishes to call back together with details of the securities that it will offer as replacement.

5. Funding Allowance

Participants in the TFF may access funding up to their Funding Allowance. Until 30 September 2020, the Funding Allowance for each participant was equal to an Initial Allowance plus an Additional Allowance. From 1 October 2020 to 30 June 2021, the Funding Allowance is equal to the sum of any existing drawdowns against the Initial Allowance; a Supplementary Allowance; and an Additional Allowance.

This section defines how allowances are calculated and updated, and outlines the associated reporting requirements. For these purposes ADIs are categorised into three groups, based on their reporting to Australian Prudential Regulation Authority (APRA).

1. Group A: ADIs with Business Credit Outstanding over $2 billion, which reported data for December 2019 on form ARF_720_1A/B and on form ARF_742_0A/B. There are 35 ADIs in this category.
2. Group B: ADIs with Credit Outstanding of over $200 million but Business Credit Outstanding less than or equal to $2 billion, which reported data for December 2019 on form ARF_720_1A/B and not on form ARF_742_0A/B. There are 90 ADIs in this category.
3. Group C: ADIs with Credit Outstanding less than or equal to $200 million which reported data for December 2019 on form ARF_323_0 and not on either form ARF_720_1A/B or form ARF 742 0A/B. There are 21 ADIs in this category.

ADIs that do not fit into any of these groups are invited to contact the Reserve Bank at RBATFF@rba.gov.au to negotiate separate arrangements.

5.1 Initial Allowance

The Initial Allowance is set at 3 per cent of a participant's Total Credit Outstanding to Australian resident households and (non-related) businesses; credit extended to non-residents is excluded. This calculation is made using data available to the Reserve Bank from existing ADI reports to APRA, as summarised in the below table:

The Initial Allowance was available for drawdown beginning on 6 April 2020 (the commencement of the TFF drawdown period).^[1] ADIs were able to draw on their Initial Allowance from that date through to 30 September 2020.

5.2 Additional Allowance

The Additional Allowance for each participant will be set at the sum of:

1. One times the dollar increase in Large Business Credit Outstanding over the TFF reporting window (if there is a decline in Large Business Credit Outstanding, then this is zero); and
2. Five times the dollar increase in SME Credit Outstanding over the TFF reporting window (if there is a decline in SME Credit Outstanding, then this is zero).

Where possible, these amounts will be calculated using data available to the Reserve Bank from existing ADI reporting to APRA. If the ADI does not already report the necessary data to APRA, the ADI must report it directly to the Reserve Bank, as summarised in the below tables. Otherwise the ADI can access only its Initial Allowance and Supplementary Allowance.

The Reserve Bank will update the ADI's Additional Allowance on an ongoing basis as new data on outstanding business credit are submitted by the ADI. The Reserve Bank may adjust Additional Allowances to account for reclassifications between lending types. Following each data submission, the value of the Additional Allowance may increase or decrease depending on the change in the stock of Large Business and SME Credit Outstanding. The TFF Worked Examples illustrate the quantity of borrowing available in various scenarios.

For ADIs in Group A, the Additional Allowance was available for drawdown beginning on 6 April 2020. For ADIs in groups B and C, the Additional Allowance became or will become available following receipt and verification of the required data by the Reserve Bank, and no earlier than 6 April 2020. For all groups the Additional Allowance will be available for drawdown until 30 June 2021. To sustain access to the Additional Allowance until this time, ADIs in groups B and C must continue reporting the new data on outstanding business credit. Failure to continue reporting might result in early termination of existing TFF Repos.

5.2.1 ADIs Making New Reports to the Reserve Bank

To submit data required to access the Additional Allowance, ADIs in groups B and C should use the Additional Allowance Reporting template provided on the Reserve Bank's website. ADIs choosing to submit data using these templates are expected to follow the reporting instructions from ARF_742_0A/B (Reporting Standard ARS 742.0), the definitions used in the Economic and Financial Statistics (EFS) Collection as specified in Reporting Standard ARS 701.0 (particularly those related to business size), as well as any relevant information in the EFS FAQs, particularly FAQ 108.^[2]

ADIs will need to submit the reporting template by email to TFFNotifications@rba.gov.au; data submissions should be received by the 15^th business day of the month following the reporting period.^[3] The Reserve Bank will need to verify the submissions using the usual data quality evaluation and query process. Unless otherwise advised, ADIs should follow timelines set out by APRA for the purposes of reporting standards when responding to data quality queries. During the Christmas and New Year's Day public holiday period, APRA may vary the usual timelines for ADIs to respond to data quality queries. If APRA extends the timeline for ADIs to respond to queries during this period, deadlines to respond to Reserve Bank data queries over the Christmas and New Year's Day public holiday period will be extended to match any extension by APRA and, as a result, notification and availability of ADIs' new Additional Allowances may be delayed in January 2021 (see section 7.3).

5.3 Supplementary Allowance

The Supplementary Allowance is set at 2 per cent of a participant's Total Credit Outstanding to Australian resident households and (non-related) businesses; credit extended to non-residents is excluded. This calculation is made using data available to the Reserve Bank from existing ADI reports to APRA, as summarised in the below table:

The Supplementary Allowance has been available for drawdown since 1 October 2020. ADIs will be able to draw on their Supplementary Allowance through to 30 June 2021.

5.4 Mergers and Consolidations

Under the RITS Regulations, ADIs are required to provide the RBA with prior written notice of any merger or consolidation: see clause 30.1(d). In addition, ADIs that intend to enter into a merger or consolidation in the period when the TFF is operational (and that have accessed or wish to access the TFF) should also provide prior written notice to the Reserve Bank by email to RBATFF@rba.gov.au and provide any information required by the Reserve Bank in respect of the merger or consolidation. In the case of a merger, this may include (to the extent relevant to the proposed merger):

• the names of the continuing and discontinuing ADIs and expected merger date;
• details on the share of the loans that were previously associated with the discontinuing ADI that will be transferred to the continuing ADI, and the expected date of transfer;
• whether there will be any asset sales by the discontinuing ADI to a third party outside of the merging ADIs, and the expected date of sale; and
• prompt notice of any likely restatements to relevant data previously reported to the Reserve Bank or APRA as a result of the merger.

There may be a period during which merging ADIs' access to new funding under the TFF is temporarily placed on hold until the Reserve Bank is able to confirm the merger details. Once those details are confirmed, the continuing ADI will regain access to the TFF to make further drawdowns of its existing Funding Allowance. The Reserve Bank will also notify the continuing ADI of a revised Funding Allowance and when it will become available; the continuing ADI will not receive an Additional Allowance for assets that are transferred (except as contemplated below). Merging ADIs will be required to enter a joint agreement with the Reserve Bank if the discontinuing ADI has drawn or intends to draw on the TFF before the merger date. Until this agreement is in place, the discontinuing ADIs' access to the TFF will be temporarily on hold.

If the loan assets used in calculating the Funding Allowance of the discontinuing ADI are being fully transferred to the continuing ADI, the Funding Allowance of the continuing ADI will be calculated from the Funding Allowance of the continuing and the discontinued ADI.

If the loan assets used in calculating the Funding Allowance of the discontinuing ADI are only partially transferred to the continuing ADI, the continuing ADI will not receive the full Funding Allowance of the discontinuing ADI.

From the merger date, the Additional Allowance of the continuing ADI will be equal to the sum of the Additional Allowances of the merging ADIs. The Additional Allowance of each merging ADI will be calculated separately. The Reserve Bank will do this by allocating changes in outstanding business credit for the merged ADI on a pro-rata basis to the stock of outstanding business credit of each of the merging ADIs from the merger date. The continuing ADI is required to report business credit data on a consolidated basis across the merging entities and is not required to report these data separately for the discontinuing ADI.

5.5 Certification Process

Reporting entities are expected to follow the data quality guidance outlined in Reporting Practice Guide RPG 702.0 ABS/RBA Data Quality for the EFS Collection.

All information provided by an ADI to APRA or the Reserve Bank must be the product of systems, processes and controls that have been reviewed and tested by the external auditor of the ADI, as set out in Prudential Standard APS 310 Audit and Related Matters for ADIs. Relevant standards and guidance statements issued by the Auditing and Assurance Standards Board provide information on the scope and nature of the review and testing required from external auditors.

All information provided by an ADI must also be subject to systems, processes and controls developed by the ADI for the internal review and authorisation of that information. These systems, processes and controls are to assure the completeness and reliability of the information provided. The Reserve Bank reserves the right to require independent audits of the Credit Outstanding data provided to APRA or the Reserve Bank at any time.

The Reserve Bank expects TFF participants to exercise due care and attention in the submission and certification of their data. Data revisions may be necessary from time to time but must be discussed with the Reserve Bank, including an explanation of which data have changed and the reason for any changes. The Reserve Bank may require TFF participants to re-submit and recertify their Credit Outstanding data in these cases.

6. Communications

6.1 Initial Notification Letter

The Reserve Bank emailed an Initial Notification letter to each eligible counterparty on 31 March 2020. The Initial Notification letter indicated:

1. The value available to them under their Initial Allowance;
2. For ADIs reporting on the ARF_742_0A form and the ARF_742_0B form (i.e. group A ADIs), the starting value of their Additional Allowance, based on their data submitted to APRA for the month of February 2020; and
3. For ADIs not reporting on the ARF_742_0A form or ARF_742_0B form (i.e. group B or group C ADIs), data reporting instructions to allow the institution to access their Additional Allowance.

If an ADI believes they are eligible to participate in the TFF, but has not received an Initial Notification Letter, they should contact the TFF at RBATFF@rba.gov.au.

6.2 Ongoing Notification Letters

Following receipt of the required data, the Reserve Bank will ordinarily notify ADIs of the new value of their Additional Allowance by email on or before the first business day of each month. The new value of their Additional Allowance will ordinarily be available for drawdown from the fourth business day of the month. For example:

On 1 September 2020, as part of the ongoing notification letters sent to each eligible counterparty, the Reserve Bank notified the value available to them under their Supplementary Allowance from 1 October 2020.

If the timeline for the usual data quality evaluation and query process is delayed following a decision by APRA (e.g. to extend the timeline for ADIs to respond to queries during the Christmas and New Year's Day public holiday period), the ongoing notification letter for the impacted month will not be sent to ADIs until after this process is complete.

7. Using the TFF

7.1 Term

The term of the funding provided under a TFF Repo will be for three years for each repurchase transaction by an ADI.

7.2 Pricing rate

From 4 November 2020, the TFF provides new funding to ADIs at a pricing rate of 10 basis points per annum, fixed for the term of the TFF Repo. ADIs can therefore access three year funding at the fixed pricing rate of 0.10 per cent per annum on new drawdowns under the Additional and Supplementary Allowances from 4 November 2020 until 30 June 2021.

The pricing rate on TFF Repos entered into under the Initial Allowance, which ceased to be available for further drawdown on 30 September 2020, remains unchanged at the fixed pricing rate of 0.25 per cent per annum.

ADIs that accessed their Additional and/or Supplementary Allowances prior to 4 November 2020 at a fixed pricing rate of 0.25 per cent per annum will have the option to request to terminate their relevant existing TFF Repo(s) and enter into new TFF Repo(s) at the new lower pricing rate of 0.10 per cent per annum for a funding term of three years from the date of the new TFF Repo transaction(s). To do so, the counterparty should contact the Reserve Bank's Domestic Markets Desk.

If and to the extent that a TFF Repo which was outstanding on 4 November 2020 was attributable to both the Initial Allowance and the Additional and/or Supplementary Allowance of an ADI, the ADI may terminate the TFF Repo but may only request to enter into a new TFF Repo at the new lower pricing rate of 0.10 per cent per annum (for a funding term of three years) with respect to the portion of the terminated TFF Repo which was attributable to the ADI's Additional and/or Supplementary Allowances. In this limited circumstance, the ADI could also request to enter into a new TFF Repo at the pricing rate of 0.25 per cent per annum with respect to the portion of the terminated TFF Repo which was attributable to the ADI's Initial Allowance. In such a case, the funding term for the new TFF Repo attributable to the ADI's Initial Allowance would be for three years less the elapsed term of the terminated TFF Repo (such that the ‘repurchase date’ for the new TFF Repo attributable to the ADI's Initial Allowance would be the same as the originally scheduled ‘repurchase date’ for the terminated TFF Repo).

The price differential for each TFF repo (which is an amount akin to interest) is due at maturity or termination of the TFF Repo.

7.3 Conducting a TFF Repo

ADIs wishing to make use of the TFF must submit a valid TFF Repo Request to enter into a TFF Repo with the Reserve Bank. To be valid, all of the fields in the request must be completed. Use of the TFF is at the sole discretion of the Reserve Bank.

In the normal course of events, valid TFF Repo requests submitted by 12.00pm AEST/AEDT will be contracted 1 business day after submission and settled 3 business days after submission. Those submitted after 12.00pm AEST/AEDT will be contracted 2 business days after submission and settled 4 business days after submission. In some circumstances, such as if there is a large volume of TFF Repo requests, the timing of when these transactions are contracted may vary, although the period between request submission and the settlement date will remain unchanged.

If a TFF Repo request is not accepted, ADIs will be notified by the Reserve Bank on the business day after they submit their request if it was received before 12pm AEST/AEDT and two business days after if it was received after 12pm AEST/AEDT. The Reserve Bank may, at its discretion, limit each ADI to one TFF Repo per week.

Funding can be accessed on business days in Sydney or Melbourne (RITS settlement days) during the drawdown period, except on the three business days between the Boxing Day and New Year's Day public holidays (Tuesday 29 to Thursday 31 December 2020 inclusive). TFF Repo requests will not be processed during this period, though settlement of contracted TFF Repos will still occur (i.e. for requests submitted and accepted prior to Tuesday 29 December 2020).

Individual transactions must be smaller than $10 billion. ADIs can make multiple drawings under the TFF up to the limit of their Funding Allowance.

All TFF drawings were applied against the Initial Allowance until it was fully drawn or until the Initial Allowance drawdown window closed on 30 September 2020, whichever came first. All subsequent TFF drawings are applied against the Supplementary and Additional Allowances.

7.4 Transaction Size and Rounding

The Reserve Bank will adjust transactions sizes to ensure that new transactions do not cause an ADI to exceed its Funding Allowance. If an ADI submits a TFF Repo Request with a requested transaction size (i.e. repo ‘Purchase Price’) greater than their unused Funding Allowance, then the Reserve Bank will notify the ADI and set the Purchase Price equal to the unused Funding Allowance when completing the trade.

The final cash amount delivered will always be equal to or slightly lower than the requested transaction size, reflecting the minimum parcel size of the securities sold.

7.5 Settlement Procedures

Settlement of TFF Repos takes place within the Austraclear system (see Settlement Procedures for more details). Each leg of the repo will be settled as an outright transaction. A manual trade confirmation will be provided by email to confirm that the trade has been conducted as a repo.

7.6 Terminating a TFF Repo

Participants may terminate any TFF Repo before its maturity date. To do so, the counterparty should contact the Reserve Bank's Domestic Markets Desk with details of the transactions that it wishes to terminate. Requests to terminate received by the Reserve Bank before 12.00pm AEST/AEDT will be processed on the following business day and settled 3 business days after submission, while those received after 12.00pm AEST/AEDT will be processed 2 business days after submission and settled 4 business days after submission.

7.7 Exceeding the Funding Allowance

In the event that an ADI's Funding Allowance declines below the amount that the ADI has drawn under the TFF, the Reserve Bank will require the ADI to reduce the amount of funding they have drawn to (or below) the Funding Allowance. To do so, the Reserve Bank will inform the ADI in its Additional Allowance notification, and set out the process for the ADI to reduce the amount of their drawn TFF funding to no greater than their Funding Allowance.

8. Publication of TFF Usage

The Reserve Bank publishes data on aggregate usage of the TFF, on a weekly basis, and aggregate allowances on a monthly basis. The Reserve Bank will not publish institution-level data without consent, but there are no restrictions on ADIs publishing data on their own usage of the TFF.

9. Contact Details

A list of contact details can be found on the TFF webpage.

Endnotes

‘Drawdown’ refers to the purchase price payable by the Reserve Bank to the eligible counterparty under TFF Repo. [1]

The ‘SME’ definition in this context is a combination of the ‘Small (business size)’ and ‘Medium (business size)’ concepts from the Reporting Standard ARS 701.0. [2]

‘Business days’ refers to business days in Sydney or Melbourne, i.e. RITS settlement days, as defined in the RITS Regulations. [3]