SOMA Securities Lending Program
Primary Dealer Frequently-Asked Question

The following is intended to address operational questions that primary dealers may have about the SOMA Securities Lending Program. Its purpose is to supplement the Announcement of Revisions to the SOMA Securities Lending Program released on February 12, 1999 and the revised SOMA Securities Lending Program Terms and Conditions issued on September 7, 1999.

General:

How often does the FRBNY lend securities?

Auctions are held around noon 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 their Fedline terminal after the auction has been announced. Loan awards are constrained by dealer limits. In addition, the FRBNY 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.

Are the auction results released?

The amount lent and weighted-average award rate for each issue are released in a timely manner after the auction via a special message over Fedline. In addition, the FRBNY Public Information office can provide this information upon request.

Are primary dealers required to bid?

Dealer participation is entirely voluntary. The FRBNY does not evaluate dealer performance based on participation in securities lending operations.

Bidding:

How do firms bid?

Dealers that have elected to participate in the program may submit bids via their Fedline terminals. The bid rate represents the lending fee rate that a firm is willing 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 $100 million par per issue and $500 million total par in outstanding loans at any one time. Loans that have not been returned prior to the 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. Partial returns are not considered good delivery on outstanding loans. The FRBNY is not responsible for deliveries that are incomplete for any reason.

As an example, a dealer with a $50 million loan outstanding in one issue is only eligible to borrow $50 million of that issue and $450 million in total. However, if good delivery on the loan is made to the FRBNY prior to the noon auction, the dealer is eligible to borrow the full $100 million of that issue and $500 million 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 dollar amount of bids. However, only up to $500 million 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. If more than two bids are submitted, the last one will be ineligible for selection.

What is the maximum amount a firm can bid for a single issue?

The maximum bid amount for a single issue is $100 million. If two bids totaling more than $100 million are submitted for a single issue, the bid with the lower bid rate is pared before consideration to keep the total within the dealer's available limit.

For example, if a dealer submits two bids on one issue; one for $50 million at a bid rate of 3.00 and one for $60 million at 3.50, the $50 million bid will be cut to $40 million before being considered in the auction. If the dealer has loans outstanding, the amount that bids are pared is increased 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 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?

Under most circumstances, 45 percent of each Treasury issue owned by SOMA with a maturity of two weeks or longer is available for lending each day. The 45 percent limit on securities auctioned is applied against the par amount owned by the portfolio, irrespective of outstanding loans. Only in instances when less than 45 percent of the securities owned are actually in the System account will fewer securities be available at auction. So, for example, if SOMA owns $1 billion of an issue, $450 million will be available to lend each day unless fewer than $450 million are in the SOMA account at the time of auction.

The FRBNY publishes SOMA holdings once a year in its Open Market Operations report. In addition, Federal Reserve primary market purchases are included in the Treasury Auction Results announcements released after each Treasury auction. These typically provide a reasonable approximation of the SOMA holdings that are most likely to be borrowed. However, SOMA holdings may vary from these amounts as a consequence of System operations such as outright transactions and matched sale purchases. As would be expected, securities held as collateral in repo operations are not available for lending.

What dollar increments should be used when bidding?

Bids must be submitted in increments of $1 million.

How many decimal places should be used when bidding?

Securities lending bids must be submitted in percent form to the second decimal place. Bids with less or more than two decimal places will not be accepted by the Fedline system.

What are the minimum and maximum bid rates?

The minimum bid rate is 1.50 percent. There is no maximum bid rate.

What is the term of the loan?

The securities lending program allows only overnight and over-the-weekend borrowing. For purposes of bidding, a "1" should be entered in the term field for both overnight and over-the-weekend operations.

How are dealers notified of awards?

Dealers are notified of awards via their Fedline terminals, in the same manner as other domestic open market operations.

Are there any excluded issues?

Under most circumstances, only issues with maturities of less than two weeks are excluded from auctions.

Where do dealers call if they experience difficulties?

Dealers may call the Fedwire Network Services Staff help desk if they are having system-related problems. For procedural questions, dealers should contact the Government Securities staff on the Open Market Desk.

Fees and Settlement:

How are collateral pledges handled?

The FRBNY settlement staff contacts dealer firms via telephone to obtain collateral pledges on loans awarded. If dealers experience difficulty making the pledged collateral delivery, they should notify the FRBNY settlement personnel as soon as possible, as failure to collateralize a loan will result in heavy penalties.

When are loans delivered?

After collateral has been pledged, securities are wired to dealers' accounts against the cash charges specified in the dealer award message.

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 FRBNY. It is calculated on an actual over 360 basis. Fees are collected upon termination of the loan, separate from the loan return process.

How are fails handled?

Loans that are not returned on the maturity date are considered fails. Failure to return loaned securities results in assessment of a penalty rate equivalent to the general collateral rate, as determined by the FRBNY. The penalty fee is collected in lieu of the previously contracted lending fee. Dealers should notify the FRBNY as soon as possible if they are unable to return borrowed securities. Failed loans must be recollateralized prior to the close of Fedwire.

Dealers also must notify the FRBNY 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 FRBNY will hold the cash collateral overnight, assess a penalty equivalent to the general collateral rate, and collect the contracted loan fee.