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The following frequently asked questions (FAQs) provide further information about the Federal Reserve's additional asset purchases of agency mortgage-backed securities (MBS) and the reinvestment of principal payments from agency securities.
Effective January 31, 2012
Why is the Desk reinvesting principal payments on agency debt securities and agency mortgage-backed securities (MBS) in agency MBS?
On September 21, 2011, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) to reinvest principal payments from agency debt and agency MBS in agency MBS.
The FOMC indicated that the policy was intended to help support conditions in mortgage markets. In doing so, this policy will contribute to a stronger economic recovery and help ensure that inflation over time is at levels consistent with the Federal Reserve’s mandate to foster maximum employment and price stability. Additional information can be found at http://federalreserve.gov/monetarypolicy/maturityextensionprogram-faqs.htm.
Why does the Federal Reserve’s System Open Market Account (SOMA) hold a portfolio of agency debt and agency MBS, and what is its size?
The Federal Reserve purchased approximately $1.4 trillion of agency debt and agency MBS between December 5, 2008 and March 31, 2010 in order to provide support to mortgage lending and housing markets and to foster improved conditions in financial markets more generally. Some of these securities subsequently matured or were prepaid. On August 20, 2010, the FOMC decided to reinvest principal payments from agency debt and agency MBS in longer-term Treasury securities. Subsequently, on September 21, 2011, the FOMC decided to reinvest these payments into agency MBS. The total size of the agency debt and MBS portfolio is available at http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html.
When did purchases begin? The Desk began to reinvest principal payments of agency debt and agency MBS in agency MBS on Monday, October 3. The current practice of reinvesting principal payments from holdings of agency debt and agency MBS in Treasury securities was halted at that time.
What types of agency MBS will the Desk purchase?
Agency MBS purchases will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, although the Desk may purchase other agency MBS if market conditions warrant.
Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for purchase. These eligible assets include, but are not limited to, 30-year and 15-year securities of these issuers. Ineligible assets include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents.
How much will the current face value of agency securities held in the SOMA vary as a result of the reinvestment of principal payments on agency securities?
The total current face value of agency securities held in the SOMA will remain near current levels, though the level will vary over time due to differences between settlement dates for transactions of agency MBS and principal payment dates for agency debt and agency MBS.
How much will the Desk purchase each month in agency MBS securities and how will this be communicated?
On or around the eighth business day of each month, the Desk will publish a tentative amount of purchases expected to take place between the middle of the current month and the middle of the following month. This number is subject to change, should the FOMC choose to alter its guidance to the Desk during the monthly period or if market conditions warrant. This amount will be approximately equal to the amount of principal payments from agency debt and agency MBS expected to be received over that period, adjusted for any variations from prior periods, as described more fully below.
How will the Desk adjust for any unexpected deviations between anticipated and actual agency MBS purchases over a given monthly period?
An adjustment for any deviation will be made by modifying the following month’s agency MBS purchases. For example, if actual agency MBS purchases were $1 billion smaller (larger) than previously announced, the Desk would increase (decrease) the following month’s anticipated agency MBS purchases by $1 billion.
Will the Federal Reserve conduct agency MBS dollar rolls or coupon swaps?
The Desk may use dollar roll transactions if needed to facilitate settlement associated with its unsettled agency MBS purchases. A dollar roll is a transaction conducted at market prices that generally involves the purchase or sale of agency MBS for delivery in the current month, with the simultaneous agreement to resell or repurchase substantially similar (although not necessarily the same) securities on a specified future date.
At this time, the Desk does not anticipate a need to conduct coupon swaps in connection with the reinvestment program. A coupon swap is a transaction conducted at market prices that involves the sale of one agency MBS and the simultaneous purchase of another agency MBS, each with different coupons.
Would agency MBS dollar roll transactions reduce the amount of total outright agency MBS purchases?
No. Dollar roll transactions are the simultaneous sale and purchase of the same face amount of agency MBS. Thus, they only affect the timing and composition of the settlement of the Federal Reserve’s agency MBS purchases.
Will the Federal Reserve assess the TMPG agency MBS Fails Charge?
Beginning February 1, 2012, the failure of the Federal Reserve’s counterparties to deliver agency MBS for the contractual settlement date of the Desk’s trades will result in the Federal Reserve assessing the applicable agency MBS Fails Charge recommended by the Treasury Market Practices Group (TMPG). Additional information can be found at http://newyorkfed.org/tmpg/.
Are the Federal Reserve's transactions in agency MBS related to the U.S. Treasury's transactions of agency MBS?
No. The Federal Reserve's transactions in agency MBS are separate from, and unrelated to, the U.S. Treasury's MBS transactions.
Will principal payments from other Federal Reserve holdings, such as those held in the Maiden Lane portfolios, be reinvested in agency MBS?
No. The FOMC directed the Desk to reinvest principal payments from agency securities held in the SOMA portfolio. Principal payments from other Federal Reserve holdings, including the Maiden Lane portfolio and SOMA assets denominated in foreign currencies, are unrelated to this directive.
How will transactions of agency MBS related to the reinvestment of principal payments of agency securities affect the New York Fed’s aggregation of agency MBS CUSIPs in the SOMA portfolio announced in January 2011?
The Desk will continue to aggregate the SOMA agency MBS holdings as needed. Additional information on the New York Fed’s aggregation of the SOMA’s agency MBS CUSIPs can be found at http://www.newyorkfed.org/markets/Agency_MBS_CUSIP_Aggregation_faqs.html. The New York Fed will continue to publish information about its aggregated CUSIPs on its public website.
Who is eligible to transact in agency MBS with the Federal Reserve?
The New York Fed’s primary dealers are eligible to transact in agency MBS directly with the Federal Reserve. Primary dealers are expected to submit bids or offers for themselves and for their customers.
How will agency MBS transactions be conducted?
Agency MBS transactions will take place in the secondary market through a competitive bidding process and in line with standard market practices. At this time, the Desk plans to continue to conduct agency MBS transactions over TradeWeb’s electronic trading platform, though trading may occur by other means if desirable.
How often will purchases take place?
Purchases will be conducted on a frequent basis over the course of each month, and will be guided by general MBS market conditions, including, but not limited to, supply and demand conditions, market liquidity, and market volatility.
Under what circumstances may the Federal Reserve conduct agency MBS dollar rolls?
Based on its current directive from the FOMC, the Desk may conduct dollar rolls in order to facilitate settlement associated with its unsettled agency MBS purchases. Dollar rolls would typically be conducted only if implied financing rates on agency MBS are notably below or above the general level of short-term interest rates, as such conditions may signal a shortage or abundance of supply, respectively, available for settlement. Selling dollar rolls effectively postpones the settlement of outstanding forward purchase commitments, while buying dollar rolls effectively brings settlement forward. The Desk will typically conduct dollar rolls close to monthly TBA settlement dates and will generally complete any such transactions prior to 72-hour day.
Will the Federal Reserve use investment managers, or other vendors, to conduct agency MBS transactions? The New York Fed will use internal staff to execute agency MBS transactions. Wellington Management Company will continue to provide investment management services and JPMorgan Chase will continue to provide custodial services.
How are the Federal Reserve’s agency MBS holdings reported?
Agency MBS transactions are reported after settlement occurs on the H.4.1. statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks." This report also includes information on total outstanding commitments to buy and sell MBS in a supplemental table. Trade settlements may occur well after trade execution due to agency MBS settlement conventions.
In addition, the New York Fed publishes the most recent SOMA agency MBS transaction activity in more detail on its website on a weekly basis. The New York Fed also publishes on a weekly basis detailed data on all settled SOMA agency MBS holdings. Any change in the composition of these reported holdings over time is a function of principal payments, outright purchases, and dollar roll activity.
Will the Desk release operation pricing results?
Yes, in order to ensure the transparency of its agency MBS transactions, the Desk will publish information on the transaction prices in individual operations mid-month, for the prior monthly period.