Foreign Reserves Management
The Federal Reserve Bank of New York manages foreign exchange reserves held by the Federal Reserve System Open Market Account (SOMA) and the U.S. Treasury Department's Exchange Stabilization Fund (ESF). These assets are invested to ensure that adequate liquidity is maintained to achieve the policy directives of the Federal Reserve System and the U.S. Treasury. The SOMA and the ESF portfolios are managed comparably so that their risk and return characteristics match as closely as possible. To the extent practical, investments are split proportionately between the SOMA and ESF holdings.
The Federal Reserve Act authorizes open market transactions, including foreign exchange transactions, and the New York Fed conducts such operations pursuant to direction from the Federal Reserve's Federal Open Market Committee (FOMC). The Gold Reserve Act of 1934 authorizes the U.S. Treasury to establish the ESF, and the New York Fed acts as fiscal agent for the management of foreign currency holdings in the ESF. The U.S. Treasury has overall responsibility for U.S. international financial policy.
The New York Fed invests the foreign exchange reserves held on behalf of the Federal Reserve System and the U.S. Treasury in a variety of instruments that have a high degree of liquidity and credit quality. Liquidity is the primary investment objective of the foreign reserves portfolio. As such, foreign exchange reserves are invested to ensure that adequate liquidity is maintained to meet potential needs. Maintaining a high degree of safety is also essential, but is a secondary objective for the purposes of portfolio management. Lastly, efforts to improve portfolio returns are considered only after the liquidity and safety objectives have been met.
The foreign reserves portfolios are passively managed against an asset allocation target, which is determined based on the portfolio's broader goals of maximizing return subject to the liquidity and risk objectives. To that end, the manager of the SOMA and the ESF foreign reserves portfolios consults regularly with the FOMC and the U.S. Treasury regarding the disposition of investments and the status of the reserves portfolios.
The SOMA and ESF portfolios hold assets denominated in euros and Japanese yen. A significant portion of the U.S. monetary authorities' foreign exchange reserves is invested on an outright basis in government-backed securities. Foreign exchange reserves are also held on deposit at the Bank for International Settlements and at foreign central banks such as the Deutsche Bundesbank, the Banque de France and the Bank of Japan. Transactions are conducted with official institutions and eligible private-sector counterparties.