The following frequently asked questions (FAQs) provide further information about the Federal Reserve Bank of New York’s (New York Fed) plans to consolidate certain agency mortgage-backed securities (MBS) that are held in the System Open Market Account (SOMA) through a process called CUSIP aggregation.
Effective September 8, 2016
What is CUSIP aggregation?
CUSIP aggregation is a process through which a number of existing MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae (agency MBS) with similar characteristics, including uniform agency backing, coupon, and original term to maturity, are consolidated into a larger pass-through security. The aggregated CUSIP securities are similar to those agency MBS being consolidated, except that the aggregated CUSIP securities represent groups of agency MBS, which themselves represent groups of residential mortgages that conform to specified requirements. The cash flows from the underlying agency MBS provide the cash flows for the aggregated CUSIP. This aggregation service is offered by Fannie Mae, Freddie Mac, and Ginnie Mae. At this time, the Desk plans to aggregate the Federal Reserve’s MBS backed by Fannie Mae and Freddie Mac, but does not plan to aggregate MBS backed by Ginnie Mae.
What is a CUSIP?
A CUSIP is a unique security identifier developed by the Committee on Uniform Security Identification Procedures.
What are the benefits of CUSIP aggregation?
CUSIP aggregation is commonly used by market participants to more efficiently manage agency MBS portfolios. Specifically, CUSIP aggregation simplifies back-office operations and reduces operational risks and costs associated with holding a large number of individual agency MBS CUSIPs.
When the second round of CUSIP aggregation began in August 2015, the Federal Reserve held around 80,000 individual agency MBS CUSIPs in the SOMA. The CUSIP aggregation process is expected to reduce the number of CUSIPs to around 20,000, which decreases the administrative costs and the operational complexities associated with the Federal Reserve’s agency MBS portfolio. A previous CUSIP aggregation program that concluded in November 2011 has saved more than $1.8 million in administrative costs to date, net of aggregation costs.
Because all of the payments of the underlying agency MBS flow through to the aggregated CUSIPs, the aggregation process will not otherwise affect the size or characteristics of the SOMA portfolio.
Does CUSIP aggregation imply anything about the Federal Reserve’s future plans related to agency MBS holdings or broader monetary policy actions?
No. CUSIP aggregation is a matter of prudent portfolio administration by the New York Fed, and no inference should be drawn about the timing or nature of any future plans related to the Federal Reserve’s agency MBS portfolio or broader monetary policy actions.
Will CUSIP aggregation interfere with Federal Reserve reinvestments of agency MBS?
No. CUSIP aggregation and reinvestments can be conducted simultaneously.
Will CUSIP aggregation affect any of the characteristics associated with the SOMA’s agency MBS portfolio?
Because all of the payments of the underlying agency MBS flow through to the aggregated CUSIPs, this process will not affect the overall size or characteristics of the SOMA portfolio. However, by reducing the number of individual agency MBS CUSIPs held by the Federal Reserve, CUSIP aggregation will enable a simplification of back-office operations and reduce the operational risks and costs associated with holding a large number of individual agency MBS CUSIPs.
What is the Desk’s CUSIP aggregation strategy?
Agency MBS will be filtered along five criteria: Pool category, vintage, agency, coupon, and original term to maturity. Pools backed by mortgages issued in Puerto Rico will first be separated out from the rest of the portfolio, followed by pools with lower original loan balances, then by pools backed by mortgages issued in the state of New York, and then by pools of mortgages originated as part of the Home Affordable Refinance Program (HARP), which have high loan-to-value (LTV) ratios. These types of pools are commonly referred to as “story pools” in the agency MBS market. These four story pool categories will be handled separately from “no story pools” (that is, those that do not qualify for any of the four story pool categories). The majority of SOMA holdings fall into the no-story-pool category.
Both story and no story pools will then be filtered by agency, coupon, original term to maturity, and the year in which the underlying mortgages were securitized into MBS, also known as the vintage. Older cohorts will be grouped together by year produced, while newer cohorts (which make up the bulk of SOMA holdings) will be grouped by quarter and year produced. For certain cohorts, where holdings are relatively low, pools will be aggregated together by agency and coupon only.
Once the above filtering process is complete, cohorts must meet two additional requirements before they can be aggregated. First, all potential aggregated pools must have a current face value of at least $110 million. Second, all potential aggregated pools must contain at least 45 underlying CUSIPs.
Any CUSIPs that do not meet these minimum requirements will be consolidated, when possible, using a less stringent filtering and criteria scheme. The resulting aggregations will be less homogenous than those created in the strategic aggregation process, but will nonetheless help consolidate the portfolio and reduce administrative costs.
The Desk’s CUSIP aggregation strategy as described above may be modified, as needed, over time.
What were the key considerations in determining this strategy?
The aggregation process was designed to reduce administrative costs and operational complexities associated with the Federal Reserve’s agency MBS portfolio using a straightforward and rules-based approach that is consistent with market functioning objectives and standard market practices.
When will the CUSIP aggregation process begin, and how often will CUSIP aggregations take place?
The Desk began CUSIP aggregation in August 2015 and regularly conducts CUSIP aggregation. However, similar to the 2011 aggregation program, the Desk maintains the flexibility to increase or decrease the pace of aggregation in order to facilitate operational efficiency.
Will CUSIPs that were created as part of the 2011 aggregation program be eligible for aggregation again this time?
Yes, aggregated CUSIPs currently held in the SOMA portfolio will be included in the aggregation strategy mentioned above and, therefore, could become part of a new aggregated CUSIP.
How will the public be informed of aggregated agency MBS holdings?
The New York Fed publishes detailed data on all settled SOMA agency MBS holdings on its public website on a weekly basis. As CUSIP aggregations take place, this weekly publication will include a listing of the individual agency MBS CUSIPs underlying each aggregated CUSIP. Other changes in the composition and size of these reported holdings over time may result from paydowns or any transaction-related activity.
In addition to publishing the updated holdings information on the New York Fed website, Fannie Mae and Freddie Mac provide information about aggregated CUSIPs, including the underlying agency MBS, on their public websites.
Will information about the agency MBS underlying the Federal Reserve’s aggregated CUSIPs remain available to the public?
Information about individual Fannie Mae and Freddie Mac agency MBS CUSIPs underlying the Federal Reserve’s aggregated CUSIPs will remain available on these organizations’ public websites. In addition, the New York Fed will include a listing of the individual agency MBS CUSIPs underlying each of its aggregated CUSIPs in the agency MBS holdings report published on its public website each week.