August 5, 2019
The following frequently asked questions (FAQs) provide further information about the Federal Reserve's reinvestment of principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in Treasury securities.
At its meeting on July 30-31, 2019, the Federal Open Market Committee (FOMC) decided to conclude the reduction of aggregate securities holdings in the System Open Market Account (SOMA) two months earlier than previously indicated. The FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York, effective August 1, 2019, to reinvest principal payments from agency debt and agency MBS holdings in Treasury securities, subject to a maximum amount of $20 billion per month; agency debt and agency MBS principal payments in excess of $20 billion will continue to be reinvested in agency MBS. These Treasury reinvestment purchases will be conducted in the secondary market 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 determine the amount of funds to reinvest in Treasury securities each month and how will this be communicated?
The amount of monthly reinvestments in Treasury securities will be approximately equal to the amount of principal payments from agency debt and agency MBS holdings anticipated to be received that month, subject to a maximum amount of $20 billion per month. On or around the ninth business day of each month, after receiving information from the agencies on expected principal payments, the Desk will publish the amount of Treasury reinvestment purchases expected to take place between the middle of the current month and the middle of the following month and publish a tentative monthly schedule of operations.
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 reinvestment 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.
What Treasury securities will the Desk purchase?
As directed by the FOMC, the Desk will purchase securities to roughly match the maturity composition of Treasury securities outstanding. 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 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 or securities trading in the when-issued market.
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. 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 through this program?
Yes, Treasury securities purchased through this program 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
Who is eligible to transact with the Federal Reserve under this program?
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?
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.