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. In addition, this includes the New York Fed plans to conduct exchanges of legacy Freddie Mac 45-day payment delay agency MBS.
Effective April 6, 2023
A CUSIP is a unique security identifier developed by the Committee on Uniform Security Identification Procedures.
What is agency MBS CUSIP aggregation?
Agency MBS CUSIP aggregation is a process through which a number of existing MBS CUSIPs issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae (agency MBS) with similar characteristics, such as coupon and original term to maturity, are consolidated into a larger pass-through security. The cash flows from the underlying agency MBS provide the cash flows for the new aggregated CUSIP so the overall size and characteristics of the MBS portfolio remain unchanged. This aggregation service is offered by Fannie Mae, Freddie Mac, and Ginnie Mae.
What are the benefits of CUSIP aggregation?
CUSIP aggregation is commonly used by market participants to reduce the administrative costs and operational complexity associated with managing an agency MBS portfolio. The Federal Reserve has previously engaged in CUSIP aggregation, including four rounds of Fannie Mae and Freddie Mac aggregations which began in 2011, 2015, 2019 and 2022 and one round of Ginnie Mae aggregation which began in 2019. Together, these aggregation programs have reduced the number of individual CUSIPs in the SOMA portfolio by over 125,000.
What are Freddie Mac exchanges?
A process offered by Freddie Mac which allows legacy 45-day payment delay MBS that were issued prior to the implementation of single security in June 2019 to be exchanged for 55-day payment delay securities that are consistent with Uniform MBS (UMBS). The new 55-day payment delay security receives a new prefix, pool number, CUSIP, and issuance date. However, the cash flows are backed by the same loans, with the only difference in the new security’s cash flow being an additional 10-day delay to receive each cash flow payment. Freddie Mac provides compensation for this payment delay at the time of exchange and publishes the amount by security type in its Exchange Float Compensation Price Grids each day.
What are the benefits of exchanges?
Exchanged securities will be consistent with 55-day UMBS, which includes securities issued by Freddie Mac since June 2019, securities issued by Freddie Mac prior to June 2019 that have been exchanged and all Fannie Mae securities. Exchanged securities, like all UMBS, have the benefit of being eligible to be delivered into UMBS TBA contracts and can be aggregated with other UMBS.
Does CUSIP aggregation or conducting exchanges imply anything about the Federal Reserve’s future plans related to agency MBS holdings or broader monetary policy actions?
No. CUSIP aggregation and conducting exchanges 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 or conducting exchanges affect any of the characteristics associated with the SOMA’s agency MBS portfolio?
Cash flows on the underlying agency MBS flow through to the aggregated CUSIPs, so CUSIP aggregation will not affect the size or characteristics of the SOMA portfolio. Cash flows on exchanged securities will flow from the same pool of loans, with the only difference being an additional 10-day delay in the cash flows being passed through, which has a negligible impact of the characteristics of the security.
The Desk is currently aggregating certain Fannie Mae and Freddie Mac UMBS CUSIPs that have a 55-day payment delay.
What is the Desk’s CUSIP aggregation strategy for Fannie Mae and Freddie Mac UMBS?
The Desk will filter along five criteria: Pool category, year produced, agency, coupon, and original term to maturity. The Desk does not intend on comingling Fannie Mae and Freddie Mac MBS at this time. Pools backed by mortgages with characteristics that make their prepayment speeds relatively more stable, like pools consisting of mortgages with lower loan balances, pools concentrated in specific geographic regions, and some others, will be first identified. These pools, commonly known as “story pools” in the agency MBS market, will be separated from “no story pools.”
Both story and no story pools are then filtered into cohorts by coupon, original term to maturity and year produced. Older cohorts are grouped together while newer cohorts are typically aggregated by year produced. For certain cohorts where holdings are relatively low, pools are aggregated together by term to maturity and coupon only. Once the filtering process is complete, cohorts will be aggregated as long as they contain at least 10 underlying CUSIPs.
Any aggregated CUSIPs that do not meet the requirements described above may be created, when appropriate, using a less stringent filtering scheme. The resulting aggregations could be less homogenous than those created in the strategic aggregation process, but nonetheless could help consolidate the portfolio and reduce administrative costs.
What is the Desk’s exchange strategy?
The Desk will exchange all SOMA legacy 45-day payment delay Freddie Mac securities for 55-day payment delay securities, where appropriate, prior to beginning the next round of CUSIP aggregation, as exchanged securities will be considered for aggregation with other UMBS.
What were the key considerations in determining the Desk’s strategy?
The aggregation and exchange process was designed to reduce the 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 standard market practices. The Desk’s CUSIP aggregation and exchange strategy as described above may be modified, as needed, over time.
The full listings of all the agency MBS CUSIPs that are included in exchanges and aggregations will be publicly available. The New York Fed publishes detailed data on all settled SOMA agency MBS holdings on its public website on a weekly basis. As these processes take place, this weekly publication will include a listing of the individual agency MBS CUSIPs that have been received. In addition, Fannie Mae, Freddie Mac, and Ginnie Mae provide information about aggregated and exchanged CUSIPs, including the underlying agency MBS, on their public websites.
Will information about the agency MBS underlying the Federal Reserve’s aggregated and exchanged CUSIPs remain available to the public?
Yes. Information about individual Fannie Mae, Freddie Mac, and Ginnie Mae agency MBS CUSIPs underlying the Federal Reserve’s aggregated and exchanged CUSIPs will remain available on these organizations' public websites.