UPDATE 2-NY Fed to launch options to enhance TSLF

(Recasts; adds details, comments)

By Tamawa Kadoya

NEW YORK, July 30 (Reuters) - The New York Federal Reserve aims to enhance its underutilized Term Securities Lending Facility (TSLF) by allowing dealers to buy options that would enable them to secure funds when funding may be tight.

The new program, part of an effort announced by the central bank earlier in the day to enhance market liquidity, will allow primary dealers -- firms that deal directly with the Fed -- to borrow up to an additional $50 billion of Treasury securities for two weeks or less around dates where higher funding needs are anticipated.

The TSLF Options Program (TOP) "is intended to enhance the effectiveness of TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates," the New York Fed said.

The options will be auctioned at a fixed price in a competitive bidding process. Auction dates will be set so as to not clash with TSLF auctions.

The New York Fed will notify of the auction dates and other terms "on or before August 8" after consulting with primary dealers, it said.

"The outline is similar to a program the Fed set up prior to the Y2K date change, in which options on Fed liquidity were auctioned off in order to provide reassurance to the market heading into that year-end period," said Michael Feroli, economist at JPMorgan in New York.

The TSLF is a bond-for-bond lending program where dealers can borrow Treasury general collateral on a 28-day basis in exchange for other securities.