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System Open Market Account
The System Open Market Account consists of the Federal Reserve's domestic and foreign portfolios, in addition to reciprocal currency arrangements made with foreign official institutions.
The SOMA domestic portfolio involves U.S. Treasury and Federal Agency securities held on both an outright and a temporary basis. The SOMA foreign currency portfolio is made up of investments denominated in euros and yen.
In addition, while the Treasury, in consultation with the Federal Reserve System, has responsibility for setting U.S. exchange rate policy, the New York Fed is responsible for executing foreign exchange intervention.
Open Market Operations
To add reserves to the banking system, the Federal Reserve buys government securities. To drain reserves from the banking system, the Federal Reserve sells securities.
The Federal Reserve Act and the Monetary Control Act of 1980 provide the Fed with the authority to exchange maturing securities and to buy and sell obligations of the U.S. government in the open market.
A specified portion of the System's holdings is allocated to each of the 12 Reserve Banks. The percentage allotments of the portfolio are adjusted annually to reflect movements of deposits among Reserve Banks.
Portfolio Value and Composition
The composition and value of the portfolio change as a result of the Fed's open market operations. Expansion is achieved by outright purchases, mostly in the secondary market from primary dealers, supplemented by some purchases from foreign central banks and other international institutions that hold accounts with the Federal Reserve. Contraction is achieved by redeeming securities at maturity or outright sales. At the end of 2008, the par value of domestic portfolio holdings was $576 billion.
The U.S. monetary authorities invest their foreign currency balances in a variety of instruments that yield market-related rates of return and have a high degree of liquidity and credit quality.
To the greatest extent practical, the investments are split evenly between the System Open Market Account and the Exchange Stabilization Fund. A significant portion of the U.S. monetary authorities’ foreign exchange reserves is invested in European and Japanese government securities. On an outright basis, the U.S. monetary authorities hold German, French, and Japanese government securities.
At the end of 2008, the SOMA foreign portfolio was $25 billion, valued at the current exchange rate, in euros and yen. The SOMA is not marked to market, so the value is measured at par each day. However, the foreign exchange component of the foreign exchange reserves is marked to market.
The SOMA portfolio is managed on a daily basis. The manager is appointed by the FOMC and customarily is a senior officer of the New York Fed. The account manager attends the FOMC meetings to report on domestic operations, as well as to be fully informed of the discussions leading to the adoption of the committee's monetary policy directive to the New York Fed.
1 Federal Agency securities here include debt issued by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), the Federal Home Loan Banks, and mortgage-backed securities issued by the FHLMC, FNMA and the Government National Mortgage Association.