The following frequently asked questions (FAQs) are intended to address operational questions that primary dealers may have about the SOMA Securities Lending Program.
October 6, 2021
How often does the New York Fed lend securities?
Auctions are held at 12 noon ET each Bank business day. Under normal circumstances, loans are not granted outside of the auction process.
How are loans allocated among dealers?
Loans are awarded based on competitive bidding in a multiple price auction for each security. Primary dealers that have elected to participate in the program may submit bids via FedTrade after the auction has been announced. Loan awards are constrained by dealer limits. In addition, the New York Fed reserves the right to reject bids at its discretion, when it is believed that granting the loan would facilitate a dealer’s ability to control a specific issue.
How will the Desk communicate the operation results?
Operation results will be posted on the Federal Reserve Bank of New York’s website following each operation. The information posted will include the total amount of propositions received, the total amount of propositions accepted, and the weighted average rate per issue. In addition, participating dealers will receive the operation results, including their accepted propositions, via FedTrade, immediately following the close of the operation.
Are primary dealers required to bid?
Dealer participation is entirely voluntary. The New York Fed does not evaluate dealer performance based on participation in securities lending operations.
How do firms bid?
Dealers that have elected to participate in the program may submit bids via FedTrade. The bid rate represents the lending fee rate that a participant is willing to pay in order to borrow the security. It is not a repo rate. Because the program operates on a borrow-versus-pledge basis, the bid rate may be considered equivalent to the spread between the general collateral rate and the specials rate for the borrowed security.
How are dealer limits calculated?
Currently, dealers may have a maximum of 25 percent of the theoretical supply available to borrow per issue and $5.0 billion total par in outstanding loans at any one time. Loans that have not been returned prior to the noon auction reduce commensurately the par amount the dealer is eligible to borrow. Good delivery on outstanding loans must be made prior to the auction time in order to free up borrowing capacity to the dealer.
As an example, if a dealer borrows $100 million in an issue of which SOMA holds $1.0 billion and makes $900 million available for borrowing, and the dealer has the $100 million loan outstanding at the time of the next auction, the dealer is only eligible to borrow $125 million more of that issue (25 percent of $900 million minus the $100 million outstanding), assuming $900 million is once again the theoretical available amount to borrow. The dealer will also only be eligible to borrow $4.9 billion more in total. However, if good delivery on the $100 million outstanding loan is made to the New York Fed prior to the noon auction, the dealer is eligible to borrow the full 25 percent of the amount available in the issue, in this case $225 million, and $5.0 billion overall.
Partial returns of outstanding loans are permitted at the discretion of the New York Fed, but the portion of outstanding loans that have not been returned prior to the noon auction reduce commensurately the par amount the dealer is eligible to borrow. The New York Fed is not responsible for deliveries on outstanding loans that are incomplete for any reason. As an example, if a dealer borrows $100 million in an issue of which SOMA holds $1.0 billion and makes $900 million available for borrowing, and the dealer only makes good delivery on $50 million of the $100 million outstanding loan to the New York Fed prior to the noon auction, the dealer is then eligible to borrow $175 million of that issue (25 percent of $900 million minus the $50 million outstanding) and $4.95 billion overall.
How many issues can a firm bid on?
There is no specific limit on the number of issues on which a firm can bid or the aggregate par amount of bids. However, only up to $5.0 billion par in loans can be awarded to any one dealer. If the dealer has loans outstanding, the maximum award amount is reduced commensurate with the par amount of outstanding loans.
How many bids can be submitted per issue?
Dealers may submit two bids per issue.
What is the maximum award amount a firm can receive in a single issue?
Dealers may be awarded up to a maximum of 25 percent of the theoretical amount available to borrow. If two bids totaling more than this limit are submitted for a single issue, the bid with the higher bid rate will be awarded prior to the bid with the lower rate, with total awards not exceeding 25 percent of the theoretical amount available to borrow. For example, for an issue where SOMA holds $1.0 billion and $900 million is available to dealers to borrow, each dealer may bid for $225 million. If a dealer submits two bids on this issue, one for $150 million at a bid rate of 1.10 and one for $100 million at 1.30, the $100 million bid will be awarded in full, leaving $125 million of the $150 million bid to be awarded at the rate of 1.10. If the dealer has loans outstanding, the amount that the dealer is eligible to borrow is pared commensurate with the par amount of outstanding loans.
In what sequence are a firm's bids considered?
The issue with the highest overall weighted-average bid rate is auctioned first, and remaining issues are auctioned in order of their weighted-average bid rates, listed in descending order. A firm’s borrowing capacity is reduced by the par amount of each loan award before bids on issues with lower weighted-average bid rates are considered. When a dealer reaches its total borrowing capacity, subsequent bids are eliminated from selection.
How do bidders know how much of each issue is being auctioned?
Ninety percent of each Treasury and Agency security owned by SOMA with fourteen or more days to maturity is available for lending each day. FedTrade refers to this amount available for borrowing as the "theoretical amount available" to dealers. As would be expected, securities held as collateral in repurchase or securities lending operations are not available for lending. If less than 90 percent of a security is in the SOMA custody account at the time of the auction due to outstanding loans and committed reverse repurchase transactions, then the remaining amount of the security in the SOMA portfolio will be available at the auction. FedTrade refers to this amount available for borrowing as the "actual amount available" to dealers.
For example, if SOMA owns $1.0 billion of an issue, $900 million will be available to lend each day. However, if $500 million of the issue is out on loan and dealers failed to return the issue by noon, and an additional $100 million has been committed as collateral for repurchase operations, SOMA will hold only $400 million of the issue in custody at the time of auction. As such, the remaining $400 million of the issue will be available at auction.
SOMA holdings are provided to the primary dealers via FedTrade daily and published on the New York Fed external website once a week to provide a reasonable approximation of the SOMA holdings on any given day. In addition, Federal Reserve primary market purchases of Treasury securities are included in the Treasury Auction Results announcements released after each Treasury auction. SOMA holdings may vary from these published amounts, however, as a consequence of System operations such as outright transactions.
What dollar increments should be used when bidding?
Bids must be submitted in increments of $1 million. Bids submitted in less than $1 million increments will not be accepted by FedTrade.
How many decimal places should be used when bidding?
Securities lending bids are submitted in percent form out to two decimal places. Bids with more than two decimal places will not be accepted by FedTrade.
What are the minimum and maximum bid rates?
The minimum bid rate is 5 basis points. There is no maximum bid rate.
What is the term of the loan?
The securities lending program allows borrowing on an overnight basis. The overnight basis will be determined in accordance with market trading conventions.
Are there any excluded issues?
Under most circumstances, only issues with a maturity of less than fourteen days are excluded from auctions.
Where do dealers call if they experience difficulties?
Dealers may call New York Fed Primary Dealer Support if they are having system-related problems. For procedural questions, dealers should contact the Treasury Market Policy staff on the Open Market Desk via their direct lines, or at 212-720-6860.
How are collateral pledges handled?
New York Fed Domestic Account Services contacts dealer firms via telephone to obtain collateral pledges on loans awarded. If dealers experience difficulty making delivery of the pledged collateral, they should notify New York Fed Domestic Account Services as soon as possible via their direct lines, or at 212-720-5901, as failure to collateralize a loan will result in heavy penalties.
What collateral is eligible for pledging?
The schedule below contains the eligible collateral for the securities lending program and applicable margin. The New York Fed may periodically make changes to the eligible collateral for the securities lending program and applicable margin and, accordingly, this schedule is subject to change. This schedule may be periodically updated without notice and is not binding on the New York Fed in any particular transaction.
|Direct obligations of the U.S. Treasury: Bills, Notes, and Bonds (including Floating Rate Notes and Inflation-Indexed Securities)
2Margin percentage is calculated by dividing the market value of the collateral pledged by the market value of the loaned amount.
When are loans delivered?
Loaned securities are wired to dealers’ accounts against the cash charges specified in the dealer award message in a timely manner after the auction is complete.
How is the lending fee calculated?
The securities lending fee rate is applied to the market value of the loaned security, as determined by the New York Fed. It is calculated on an actual over 360 basis.
How are fails handled?
Loans that are not returned on the maturity date are considered fails. Failure to return loaned securities will result in the assessment of a penalty fee equivalent to the general collateral rate, as determined by the New York Fed, as well as any applicable Fails Charge determined in accordance with the Fails Charge Trading Practice published by the Treasury Market Practices Group.
The penalty fee is collected in lieu of the previously contracted lending fee, but is in addition to the applicable Fails Charge. Dealers should notify New York Fed Domestic Account Services as soon as possible if they are unable to return borrowed securities via their direct lines, or at 212-720-5901. Failed loans must be extended (i.e., the loan re-booked for an additional day) and subsequently recollateralized prior to the close of Fedwire.
Dealers also must notify the New York Fed if they are unable to deliver the pledged Treasury collateral against a loan on the loan date. If a firm fails to deliver collateral, the New York Fed will hold the cash collateral overnight, and assess a penalty fee equivalent to the general collateral rate, in addition to the contracted loan fee and any applicable Fails Charge.