October 16, 2019
The following frequently asked questions (FAQs) provide further information about the Federal Reserve's secondary market purchases of Treasury securities related to maintaining an ample supply of reserves and reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in Treasury securities.
How does the Desk intend to implement the FOMC’s plan to purchase Treasury bills to maintain an ample supply of reserves?
Effective October 15, 2019, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. These reserve management purchases of Treasury bills are in addition to the Desk’s ongoing purchases of Treasury securities related to the reinvestment of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS. For the most recent Desk Statement regarding Treasury bill purchases, see: https://www.newyorkfed.org/markets/opolicy/operating_policy_191011.
What factors determined the initial pace of $60 billion per month in reserve management purchases of Treasury bills?
In order to implement the FOMC’s October 15, 2019 directive to maintain over time ample reserve balances at or above the level that prevailed in early September 2019, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November. Purchases of Treasury bills are expected to offset recent and expected growth in non-reserve liabilities (such as currency in circulation) and to maintain over time reserves at levels that will absorb normal variability in those liabilities (such as those caused by changes in the Treasury General Account) without the need for active management of the supply of reserves. The initial pace of Treasury bill purchases also takes into account market functioning considerations and allows for some adjustments around periods with sharp expected declines in reserves or liquidity conditions.
What factors might drive a change in the timing or amount of reserve management purchases of Treasury bills?
The Desk will adjust the timing and amount of reserve management Treasury bill purchases as necessary, in order to maintain an ample supply of reserve balances over time in accordance with the directive from the FOMC. Several factors may affect the timing and amount of purchases, and therefore result in a change in the monthly purchase amount. These can include, for example, changes in the expected growth in non-reserve liabilities or their variability as well as market functioning, liquidity, or volatility.
How does the Desk intend to implement the FOMC’s plan to reinvest principal payments from agency debt and agency MBS in Treasury securities?
Since August 1, 2019, the Desk, as directed by the FOMC, has reinvested principal payments from agency debt and agency MBS holdings in Treasury securities, subject to a maximum amount of $20 billion per month. These reinvestment purchases are conducted across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. The FOMC will revisit this initial reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
How will the Desk communicate the amount of planned Treasury securities purchases each month?
The planned amount of both reserve management purchases and reinvestment purchases will be communicated on the Treasury Securities Operational Details page on or around the ninth business day of each month. At that time, the Desk will also release a tentative schedule of reserve management and reinvestment purchase operations that will be conducted over the one-month period until the next announcement. The operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alter its guidance to the Desk.
The amount of monthly reinvestments of principal payments from agency debt and agency MBS in Treasury securities will be approximately equal to the amount of principal payments anticipated to be received that month based on information from the agencies, subject to a maximum amount of $20 billion per month. The reinvestment amount will reflect 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 purchase amount may deviate slightly from the planned purchase amount due to operational reasons. The Desk will not make adjustments for these deviations in future months' purchases.
What Treasury securities will the Desk purchase?
Consistent with the FOMC directive, the Desk will purchase Treasury bills in its reserve management purchases and purchase nominal coupons, bills, TIPS, and FRNs in its reinvestment purchases. The composition of reinvestment purchases will roughly match the maturity composition of Treasury securities outstanding.
For reserve management, the Desk will purchase securities within the Treasury bill sector, specifically securities with maturities of up to 1 year from the date of the operation.
For reinvestments, the Desk will distribute the monthly reinvestment amount across 11 different sectors based on the proportional par amount of Treasury securities outstanding in each sector, using the 12-month average as of the end of July 2019. The table below includes the specific sectors the Desk will use and approximate sector weights. The sector weights are subject to change and will be re-evaluated periodically.
|Nominal Coupon Securities by Maturity Range*||Bills||TIPS**||FRNs|
|SECTOR||0-¾ yrs||¾-1½ yrs||1½-2¼ yrs||2¼-3 yrs||3-4½ yrs||4½-7 yrs||7-20 yrs||20-30 yrs||0-1 yrs||0-30 yrs||0-2
* For determining sector weights, the on-the-run 3-year note will be considered part of the 2¼ to 3-year sector and the on-the-run 7-year note will be considered part of the 4½ to 7-year sector.
** The TIPS sector weight is based on unadjusted par amounts.
The Desk’s monthly purchase schedule for reserve management and reinvestment purchases will communicate the specific maturity range of each operation in advance. The Desk anticipates transacting across the full maturity range in each sector for most operations; however, in some circumstances the Desk may not always transact in the sector’s full maturity range for market functioning and operational efficiency reasons. The Desk will refrain from purchasing securities that are trading with heightened scarcity value in the repo market for specific collateral, newly issued nominal coupon securities, and securities that are cheapest to deliver into active Treasury futures contracts. Additionally, the Desk will not purchase securities with 4 weeks or less to maturity. Specific issues that will be excluded from consideration will be announced at the start of each operation. Currently, the Desk does not plan to purchase STRIPS, securities trading in the when-issued market, or cash management bills.
Additionally, in the TIPS sector, the Desk plans to alternate between transacting in shorter-dated and longer-dated maturity ranges in TIPS from month to month. The Desk will not purchase TIPS with one year or less to maturity. Each monthly operation will target the purchase amount indicated by the TIPS overall sector weight and the monthly reinvestment amount.
What are the limits on the SOMA holdings of any one Treasury issue?
The Desk will limit SOMA holdings to a maximum of 70 percent of the total outstanding amount of any individual Treasury security.
What is the maximum amount the Desk will purchase in each issue?
In order to slow the rate of purchases for securities in which the SOMA portfolio already has large holdings as a proportion of Treasury securities outstanding, the Desk will allow the share of SOMA holdings of an individual Treasury security to rise above 35 percent only in modest increments, as specified in the table below. Subject to market conditions, the Desk may further limit the size of additional purchases in certain issues or otherwise change the stated limits as needed.
SOMA Security Ownership Prior to Operation as a Percentage of Outstanding
|Maximum Purchase Amount per Security in Operation is the Lesser of (A) or (B):|
|0-30%||N/A||(35% of Outstanding) minus SOMA Holdings|
|30%-47.5%||5% of Outstanding||(50% of Outstanding) minus SOMA Holdings|
|47.5%-59%||2.5% of Outstanding||(60% of Outstanding) minus SOMA Holdings|
|59%-70%||1% of Outstanding||(70% of Outstanding) minus SOMA Holdings|
|Above 70%||Not Eligible for Purchase|
Will the Federal Reserve lend the Treasury securities it purchases?
Yes, Treasury securities purchased will be available to borrow through the SOMA’s securities lending facility. For more information on SOMA Securities Lending, please see: https://www.newyorkfed.org/markets/sec_faq
How are SOMA holdings of Treasury securities reported?
SOMA Treasury holdings are reported on a weekly basis in the H.4.1 statistical release. Over any period, changes in the H.4.1 line item "U.S. Treasury securities" reflect the net effect of rollovers, purchases, and sales of Treasury securities, as well as movements in inflation compensation. For a full list of SOMA holdings, please see https://www.newyorkfed.org/markets/soma/sysopen_accholdings
The Federal Reserve Bank of New York’s primary dealers are eligible to transact in these operations directly with the Federal Reserve. Dealers are expected to submit offers for both themselves and their customers.
How will the purchases be conducted?
The Desk will conduct purchases of Treasury securities 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 securities are awarded at the price corresponding to the participant’s offer in the operation, resulting in the security being awarded at multiple prices. The minimum auction amount, offer size, and offer increment are each $1 million. Participants can submit up to nine offers per security, with each offer reflecting both a price and par amount.
Offers in FedTrade operations will be evaluated based on their proximity to prevailing market prices at the close of the auction, as well as measures of relative value. Relative value measures are calculated using the Federal Reserve Bank of New York’s proprietary model.
How often will the Desk conduct operations to purchase Treasury securities?
For reserve management purchases of Treasury bills, the Desk generally anticipates conducting several operations per month. For purchases associated with the reinvestment of agency debt and agency MBS, the Desk generally anticipates conducting one operation per sector during each monthly period. However, the number of operations per month may be adjusted for operational reasons, holiday schedules, or due to changes in market conditions in order to support smooth market functioning.
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 amount purchased per issue. In addition, participating dealers will receive the operation results, including their accepted propositions, via FedTrade, immediately following the close of the auction.
Will the Desk release operation pricing results?
The Desk will publish information on transaction prices in individual operations at mid-month for the prior monthly purchase period. For each security purchased in each operation, the Desk will release the weighted-average accepted price, the highest accepted price, and the proportion accepted of each proposition submitted at the highest accepted price.
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.
Whom should dealers call if they experience difficulties during the operation?
Primary dealers may call the Federal Reserve Bank of New York Trading Desk with submission and verification questions. For system-related problems, dealers may call the Federal Reserve Bank of New York Primary Dealer Support.
How will the Desk manage the SOMA’s maturing Treasury securities?
As directed by the FOMC, the Desk will roll over maturing Treasury securities at auction. For more information on Treasury rollovers, see https://www.newyorkfed.org/markets/treasury-rollover-faq.html.
When and how does Treasury security settlement take place?
Treasury security settlement will typically occur on a T+1 basis, i.e. one business day after the day of the operation, via the Fedwire Securities System.