- The Federal Reserve System Open Market Account (SOMA) is a portfolio of U.S. Treasury and Federal Agency securities1, foreign currency investments and reciprocal currency arrangements.
- At the end of 2008, the domestic securities portfolio held $496 billion in securities outright and $80 billion in repurchase agreements.
- The foreign currency portfolio held $25 billion in non-dollar assets denominated in euros and yen at the end of 2008.
- Reciprocal currency arrangements with foreign institutions totaled $554 billion at the end of 2008.
- Interest on the portfolio provides a large portion of the Fed's income; nevertheless, the central bank buys and sells securities purely to implement monetary policy and not for profit.
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.
The Federal Open Market Committee (FOMC) has designated the Federal Reserve Bank of New York to execute open market transactions on behalf of the entire Federal Reserve System. The resulting investments are held in the SOMA portfolio.
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.
The U.S. monetary authorities—the Treasury and the Fed—may intervene in the foreign exchange market to counter disorderly market conditions, using funds that belong to the Federal Reserve and to the Exchange Stabilization Fund of the Treasury Department.
Open Market Operations
Traditional open market operations—the buying and selling of securities in the marketplace—are one of the basic tools the Federal Reserve uses to conduct monetary policy, that is, influencing the cost and availability of money and credit in the U.S. economy.
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
Most of the assets in the domestic portfolio are Treasury and Federal Agency securities that are held outright. The Federal Reserve also holds government securities on a temporary basis under repurchase agreements and occasionally issues temporary liabilities delivering securities under reverse repurchase agreements.
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.
On December 12, 2007, the FOMC announced that it had authorized temporary reciprocal currency arrangements—central bank liquidity swap lines—with the European Central Bank and the Swiss National Bank to help provide liquidity in U.S. dollars to overseas markets. Subsequently, the FOMC authorized liquidity swap lines with additional central banks.
Swap lines are now authorized with the following institutions: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank. The FOMC has authorized these liquidity swap lines through October 30, 2009. At the end of 2008, these swap lines totaled $554 billion.
The interest received by the Federal Reserve on its portfolio holdings constitutes a large portion of the System's income. Unlike individuals or private institutions, however, the Fed acquires and sells securities purely to implement monetary policy and not for profit. The interest earned on those holdings is apportioned to the individual Federal Reserve Banks according to the percentage of the portfolio each owns. A portion of the earnings is used for salaries and other operation expenses of the Banks, with a small amount set aside in a surplus account. The remaining income is paid to the U.S. Treasury.
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.