The following frequently asked questions (FAQs) provide further information about the Federal Reserve's secondary market purchases of agency mortgage-backed securities (MBS).
Effective March 23, 2020
How does the Desk intend to implement the FOMC’s plan to purchase agency MBS?
Effective March 23, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of agency MBS in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS. In addition, all principal payments from agency debt and agency MBS will be reinvested in agency MBS. For the most recent Desk Statement regarding purchases, see: https://www.newyorkfed.org/markets/opolicy/operating_policy_200323.
What factors might drive a change in the timing or amount of Agency MBS purchases?
As part of the FOMC directive effective March 23, 2020, the Committee instructed the Desk to conduct agency MBS purchases in the amount needed to support the smooth functioning of agency MBS markets. The size and composition of operations will be adjusted as needed to foster smooth agency MBS market functioning and efficient and effective policy implementation.
How will the Desk communicate its agency MBS purchase amount and schedule?
The Desk will publish a tentative schedule of FedTrade agency MBS operations twice a month, each covering a period of approximately two weeks. If needed, the overall monthly purchase amount will be adjusted support the smooth functioning of the market for agency securities.
The tentative schedule will include information on the upcoming operation dates, times, security types (agency and coupon) and maximum purchase amount per security. The operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alter its guidance to the Desk.
What types of agency MBS will the Desk purchase?
Agency MBS purchases will generally be concentrated in recently produced coupons in 30-year and 15-year fixed rate agency MBS in the To-Be-Announced (TBA) market. The Desk may purchase other agency MBS if market conditions warrant. Only agency MBS guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible for purchase.
What explains changes in the total current face value of agency MBS held in the SOMA?
The total current face value of agency MBS held in the System Open Market Account (SOMA) will increase over time as a result of additional asset purchases. However, given that settlement of agency MBS transactions can occur up to three months in the future, the impact on reported holdings will occur at a lag. In addition, reported holdings due to the timing of principal payment dates for agency debt and agency MBS.
How much will the Desk purchase each month in agency MBS and how will this be communicated?
Agency MBS purchases and reinvestments in agency MBS will be purchased at a monthly pace as directed by the FOMC in its most recent statement (see http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm). The amount published is subject to change should the FOMC alter its directive to the Desk during the month or if market conditions warrant.
On or around the ninth business day of each month, the Desk will publish a tentative amount of total purchases expected to take place between the middle of the current month and the middle of the following month. The reinvestment amount reflects the principal payments anticipated to be received that month; however, actual principal payments received may deviate slightly from the anticipated amount. In addition, the actual purchases may deviate slightly from the stated purchase amount due to operational reasons. The Desk will not make adjustments for these deviations in future months' purchases.
How will agency MBS purchases be conducted?
The Desk will conduct purchases of agency MBS via FedTrade, the Desk's proprietary trading system. FedTrade operations will be conducted using multiple-price, competitive auctions with approved counterparties. A "multiple-price" auction is an auction in which the same security can be awarded at different prices, with awards given to participants at a price corresponding with an individual offer submitted to the operation. The minimum auction amount, offer size, and offer increment are each $1 million. Participants can submit up to ten offers per security, with each offer reflecting a price and par amount. Offers in FedTrade operations will be evaluated based on their proximity to prevailing market prices at the auction close.
How often will purchases take place?
Purchases will be conducted on a regular basis over the course of each monthly period, with the timing guided in part by general agency MBS market conditions, including, but not limited to, supply and demand, market liquidity, and market volatility. The Desk may adjust the size, frequency and composition of agency MBS purchase operations depending on the monthly reinvestment amount.
Will the Federal Reserve conduct agency MBS dollar rolls or coupon swaps?
The Desk may use dollar roll and coupon swap transactions if needed to facilitate settlement associated with its unsettled agency MBS purchases. A dollar roll is a transaction that generally involves the sale of agency MBS for delivery in one month with the simultaneous agreement to purchase agency MBS, with the same agency, tenor and coupon, for delivery in a different month. A coupon swap is a transaction that involves the sale of one agency MBS and the simultaneous purchase of another agency MBS, each with different agencies, coupons, and/or tenors.
The Desk would conduct dollar roll and coupon swap transactions via Tradeweb, a commercial trading platform. Transactions conducted over Tradeweb would be executed through a competitive bidding process in line with standard market practices.
Under what circumstances may the Federal Reserve conduct agency MBS dollar rolls?
Based on the directive from the FOMC, the Desk may conduct dollar rolls in order to facilitate settlement associated with its unsettled agency MBS purchases. Selling dollar rolls effectively postpones the settlement of outstanding forward purchase commitments, while buying dollar rolls effectively brings settlement forward. Dollar rolls would typically be conducted only if implied financing rates on agency MBS are notably below or above the general level of short-term interest rates, as such conditions may signal a shortage or abundance of supply, respectively, available for settlement. The Desk may conduct dollar rolls throughout the month, but at least two business days before TBA settlement dates. The amount of dollar rolls conducted may vary throughout the month depending on movements in implied financing rates.
Under what circumstances may the Federal Reserve conduct agency MBS coupon swaps?
Based on the directive from the FOMC, the Desk may conduct coupon swaps in order to facilitate settlement associated with its unsettled agency MBS purchases. However, the Desk does not anticipate conducting such transactions unless market conditions suggest that purchases are unlikely to be settled for quite some time, as suggested by dollar-roll implied financing rates that are persistently below the general level of short-term interest rates, prolonged fails, or other market functioning indicators.
Would agency MBS dollar roll or coupon swap transactions reduce the amount of total outright agency MBS purchases?
No. Dollar roll and coupon swap transactions are the simultaneous sale and purchase of the same face amount of agency MBS. Thus, they only affect the timing or composition of the settlement of the Federal Reserve's agency MBS purchases.
How will the Desk communicate the FedTrade operation results?
Operation results from FedTrade will be posted on the New York Fed’s website following each operation. The information posted will include the total amount of propositions received per auction, the total amount of propositions accepted per auction, the total amount accepted per security, and the settlement month. In addition, participating dealers will receive the operation results, including their accepted propositions, via FedTrade, immediately following the close of the auction.
How will the Desk communicate agency MBS transaction details?
The New York Fed publishes SOMA agency MBS transaction activity on its website on a weekly basis. Activity data includes the total amount of weekly purchases and dollar roll transactions by agency, coupon, maturity and settlement month. This information will include transactions conducted over FedTrade and Tradeweb, but will not include transactions related to small value exercises.
How are SOMA holdings of agency MBS reported?
Agency MBS transactions are reported after settlement occurs on the H.4.1. statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks." This report also includes information on total outstanding commitments to buy and sell MBS in Table 3 entitled "Supplemental Information on Mortgage-Backed Securities." Trade settlements may occur well after trade execution due to agency MBS settlement conventions. The New York Fed also publishes on a weekly basis detailed data on all settled SOMA agency MBS holdings. Any change in the composition of these reported holdings over time is a function of principal payments, outright purchases and sales, CUSIP aggregation, dollar roll, and coupon swap activity.
Will the Desk release operation pricing results?
Yes. In order to ensure the transparency of its agency MBS transactions, the Desk, at mid-month for the prior monthly period, will continue to publish historical operation results. This information will include the transaction prices in individual operations, including transactions related to small value exercises. In addition to the pricing information released each month, Section 1103 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that detailed operational results, including counterparty names, be released two years after each quarterly transaction period.
Who is eligible to transact in agency MBS with the Federal Reserve?
The New York Fed's approved counterparties are eligible to transact in agency MBS directly with the Federal Reserve. Approved counterparties are expected to submit bids or offers for themselves and for their customers.
Whom should dealers call if they experience difficulties during a FedTrade operation?
Approved counterparties may call the New York Fed's Trading Desk with submission and verification questions. For FedTrade system-related problems, dealers may call the New York Fed's Primary Dealer Support line.
Does the Federal Reserve assess the TMPG agency MBS fails charge?
Yes. Effective February 1, 2012, the failure of the Federal Reserve's counterparties to deliver agency MBS for the contractual settlement date of the Desk's trades has resulted in the Federal Reserve assessing the applicable agency MBS fails charge recommended by the Treasury Market Practices Group (TMPG). Additional information can be found at https://www.newyorkfed.org/tmpg/index.html.
Does the Federal Reserve require the posting of margin for unsettled agency MBS trades?
Yes. The Federal Reserve requires counterparties to post margin to the New York Fed. Margin is calculated on a daily basis and serves to protect the New York Fed from counterparty credit risk exposure arising from the unsettled agency MBS TBA trades.
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 with similar characteristics, including uniform agency backing, coupon, and original term to maturity, are consolidated into a larger pass-through security. The aggregated CUSIPs are similar to those agency MBS being consolidated, except that the aggregated CUSIP 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. Additional information about CUSIP Aggregation can be found on the Agency MBS CUSIP Aggregation FAQ page.