Mortgage Operations Counterparty Pilot Program

August 5, 2014

The Federal Reserve Bank of New York (FRBNY) is introducing a pilot program for a few firms that do not meet the capital minimum requirement for primary dealers to act as counterparties in agency mortgage-backed securities (MBS) operations it conducts for the System Open Market Account (SOMA) portfolio. The program will run for about one year—a period long enough for the FRBNY to evaluate the benefits and costs of transacting with a wider range of participants in its SOMA operations.1 Pilot program participants will participate in the FRBNY’s operations to conduct secondary market outright purchases or sales of agency MBS, along with Primary Dealers.2 Pilot program participants will be subject to appropriate size limitations on aggregate daily bids and unsettled awards to be determined by the FRBNY and commensurate with the firm’s capital position.

Selection for this pilot program does not constitute designation as a Primary Dealer. Participation in this pilot program does not guarantee the ability to participate in any permanent program the FRBNY may establish in the future. Pilot program participants will be announced on a public list on the FRBNY’s website. Selection and designation of a participant in the Mortgage Operations Counterparty Pilot Program does not in any way constitute an endorsement of a firm by the FRBNY, and should not be viewed by third parties as a replacement for prudent counterparty risk management and due diligence.

The FRBNY’s intent in conducting this pilot program is to explore ways to broaden access to open market operations (OMOs), and to determine the extent to which firms beyond the Primary Dealer community can augment the FRBNY’s operational capacity and resiliency in its monetary policy operations. This pilot will allow the FRBNY to gain further experience in dealing with a wider range of firms. Interested firms will be evaluated on the basis of their business capabilities and their ability to meet the FRBNY's stated expectations of counterparties for agency MBS operations throughout the duration of the pilot program. In order to maximize the information we can gain from this pilot, the FRBNY intends to select a small subset of eligible firms that is diverse with respect to characteristics such as size and geographic reach.

The FRBNY is committed to ensuring to the maximum extent possible and consistent with applicable law, the fair inclusion and utilization of minority-owned, women-owned, veteran-owned, and other diverse firms in the business and activities of the FRBNY. Such firms are encouraged to consider submitting an expression of interest for participation in this pilot program.

The FRBNY reserves the right to disclose information regarding pilot program participants. Details of transactions undertaken with pilot program participants will be disclosed in accordance with the requirements of Section 1103 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law requires the disclosure of certain information, including information about the identities of counterparties and the size, type and rates for transactions, regarding open market transactions between a Federal Reserve Bank and nongovernmental entity that have been authorized under specified provisions of Section 14 of the Federal Reserve Act, which includes secondary market agency MBS purchases and sales.


To be eligible for the pilot program and to maintain eligibility once a pilot program participant, a firm must:

  • Be a U.S. broker-dealer registered with and supervised by the Securities and Exchange Commission (SEC) or a U.S.-chartered bank that is subject to supervision by bank supervisors; 
  • Meet the following capital requirements as of the date of submission of the expression of interest form:
    • A broker-dealer must have net regulatory capital of more than $1 million and less than $150 million, and a minimum total owners’ equity of $1 million
    • A bank must have more than $1 million and less than $150 million of Tier 1 capital as defined in the applicable federal banking regulations, and be considered "Well Capitalized" by its primary regulator 
  • Not be closely affiliated3 with any entity that exceeds the maximum capital specified above;
  • Be able to demonstrate a consistent and meaningful transaction presence (relative to the firm’s size) in the secondary market for agency MBS securities, as both seller and buyer, acting as principal;
  • Be able to confirm and arrange settlement of transactions with the FRBNY’s designated custodian at volumes expected by the FRBNY; and
  • Maintain an effective compliance program and control environment.

The FRBNY will not select any firm for participation in the pilot program that is, or has been (within the last year) subject to litigation or regulatory action or investigation that the FRBNY determines material or otherwise relevant to the potential counterparty relationship. In making such determination, the FRBNY will consider, among other things, whether and how any such matters have been resolved or addressed and the firm’s history of such matters, and may consult with the appropriate regulators for their views. The FRBNY may also check the firm’s standing with the appropriate regulators.

In selecting pilot program participants, the FRBNY will apply the principles of the Primary Dealer Act of 1988 (the Act)4, which may limit the eligibility of firms that are owned or controlled by non-U.S. persons.

Expectations to be met by Pilot Program Participants

Participants in this pilot program will be expected to meet the following business, operational, financial and compliance requirements.

Business Standards

  • Meet program standards for participation as principal in SOMA agency MBS purchase and sale operations pilot program.
    • Participate in at least 2 agency MBS operations each month.
    • Execute at least 1 agency MBS trade with SOMA each quarter.
    • Bid at prices that are reasonable when compared to the range of prices prevailing in the market, taking into account market volatility and other risk factors, and are competitive with prices that Primary Dealers quote.
    • Operate under the FRBNY’s pre-specified limit of aggregate outstanding transaction volume.
  • Act as a responsible counterparty and market participant. On an ongoing basis, the FRBNY expects all firms with whom it executes agency MBS purchases and sales to act as responsible counterparties and market participants in their overall conduct and support of market efficiency and liquidity. Of note, the FRBNY expects its counterparties to be familiar with the Best Practices for Treasury, Agency Debt, and Agency Mortgage-Backed Securities Markets published by the Treasury Market Practices Group (TMPG)5 and to ensure that its trading practices are in accordance with the principles and goals described therein.
  • Provide useful information on agency MBS market developments to the FRBNY trading desk on a proactive basis, as developments warrant.


  • Have internal or third party arrangements in place to ensure "back office" capacity of sufficient size and experience to be able to confirm and arrange settlement of transactions with the FRBNY’s designated custodian.
  • Comply with the FRBNY’s daily initial and variation margin posting requirements and fails charge regime for outstanding agency MBS trades. 
  • Make arrangements for the firm to ensure timely and direct telecommunications with the FRBNY's trading desk for the purpose of submitting auction bids, executing trades, settling trades and troubleshooting problems that may arise during an agency MBS operation.
  • Meet hardware and software and documentation requirements for accessing and using the FRBNY's FedTrade system and participate, initially and from time-to-time, in testing to ensure successful operations. Ensure ongoing internal IT support for use of the FRBNY's FedTrade system for participation in agency MBS operations.

Financial and Credit Condition

  • Non-public firms: Make timely delivery of quarterly financial statements, annual audited financial statements with notes, and other relevant disclosures to the FRBNY throughout the pilot program period.
  • Public firms: Make timely delivery of any financial statements and other requested information to the FRBNY throughout the pilot program period, regardless of whether or not such information is publicly available.

Compliance Disclosures

  • Disclose promptly to the FRBNY on an ongoing basis any litigation, regulatory action or investigation, or internal compliance matter which may have a material adverse impact on the counterparty’s relationship with the FRBNY, including, but not limited to, matters related to the firm’s activity in the agency MBS market.6

Process for Expressions of Interest

If your firm would like to express an interest in participating in this pilot program, please submit the following materials that are attached to this announcement to

Upon submission of all materials, the FRBNY will evaluate candidates and select pilot program participants in its sole discretion. Firms that meet the eligibility criteria may be asked to participate in one or more on-site visits by FRBNY staff to obtain additional information as needed in the course of the evaluation process.
The FRBNY expects to select a small number7 of pilot program participants that represent a range of size and geographic characteristics. The selected pilot program participants will then undergo a brief orientation and onboarding period prior to the launch of the pilot program.

Firms should not use their plans to become a pilot program participant in any advertising, promotional material, or publication, without the FRBNY’s prior written consent.
The FRBNY retains the right to conduct a review of its business relationship with any pilot program participant and to terminate or limit its business relationship with any pilot program participant at any time and for any reason, including failure to meet the eligibility criteria and expectations on an ongoing basis. The FRBNY also retains the right to end the pilot program at any time and for any reason.

1The length of the program should not be viewed as providing any information about the stance of monetary policy.

2 Agency MBS purchase operations are limited to newly-issued agency MBS in the To-Be-Announced (TBA) market. Only 15-year and 30-year fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible for purchase. CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents are not eligible for the program.  Dollar roll transactions are excluded from this pilot program. See /markets/ambs/ for more details.

3 Applicant’s close affiliates are defined as any 1) entity that is more than 50% owned, directly or indirectly, by the applicant; 2) entity that is more than 50% owned, directly or indirectly, by any other affiliate of the applicant; 3) person or entity that owns, directly or indirectly, more than 50% of the applicant; 4) person or entity that owns, directly or indirectly, more than 50% of any other affiliate of the applicant; or 5) entity a majority of whose board of directors or a majority of whose general partners are directors or officers of the applicant, or of any affiliate of the applicant.

4 The Primary Dealer Act provides that a foreign-owned dealer or bank may not be newly designated, or continue to be designated, as a primary dealer in cases where the Board of Governors of the Federal Reserve System (Board) and the New York Fed have concluded that the country in which a foreign parent is domiciled does not provide the same competitive opportunities to U.S. companies as it does to domestic firms in the underwriting and distribution of Government debt.  As of the date of this announcement, the Board and the New York Fed have made affirmative determinations with respect to France, Germany, Japan, the Netherlands, Switzerland and the United Kingdom. In addition, firms controlled by persons domiciled in Canada and Israel are grandfathered under the Act.

5 For more information about the TMPG, see

6 For these purposes, a matter which “may have a material adverse impact on the counterparty relationship” includes any matter that typically would require escalation to the senior management of the firm due to potential for reputational damage, legal or regulatory sanctions, or financial loss.

7 Conducting the pilot program with a relatively small number of firms will keep the FRBNY’s operational costs relatively low and will also reduce the time needed to onboard these new pilot program counterparties once they have been selected.

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