SOMA Securities Lending Program Primary Dealer Frequently-Asked Questions (Revised)

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 June 25, 2003 and the revised SOMA Securities Lending Program Terms and Conditions issued on June 25, 2003.

General:

How often does the FRBNY lend securities?

Auctions are held at 12 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 total amount lent and weighted-average award rate for each issue are released in a timely manner after the auction is complete via a special message over Fedline. The summary information is also posted on the FRBNY external web site daily.

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 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 $200 million par per issue and $1.0 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, a dealer with a $150 million loan outstanding in one issue is only eligible to borrow $50 million more of that issue and $850 million more in total. However, if good delivery on the $150 million outstanding loan is made to the FRBNY prior to the noon auction, the dealer is eligible to borrow the full $200 million of that issue and $1.0 billion overall.

Partial returns of outstanding loans are permitted at the discretion of the FRBNY, 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 FRBNY is not responsible for deliveries on outstanding loans that are incomplete for any reason.

As an example, a dealer with a $150 million loan outstanding in one issue is only eligible to borrow $50 million more of that issue and $850 million more in total. If the dealer only makes good delivery on $50 million of the $150 million outstanding loan to the FRBNY prior to the noon auction, the dealer is only eligible to borrow $100 million of that issue and $900 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 $1.0 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. 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 $200 million. If two bids totaling more than $200 million are submitted for a single issue, the bid with the lower bid rate is pared in order to keep the total within the dealer’s available limit.

For example, if a dealer submits two bids on one issue, one for $150 million at a bid rate of 1.10 and one for $60 million at 1.30, the $150 million bid will be cut to $140 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?

65 percent of each Treasury issue owned by SOMA with a maturity of two weeks or longer is available for lending each day. The 65 percent limit on securities auctioned is applied against the par amount owned by the portfolio, irrespective of outstanding loans and committed reverse repurchase transactions. The resulting 65 percent dollar limit is then compared to the total par amount actually in custody, taking outstanding loans and committed reverse repurchase transactions into consideration. The lesser of the two will be available at auction.

For example, if SOMA owns $1 billion of an issue, $650 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, SOMA will hold only $500 million of the issue in custody at the time of auction. As such, only $500 million of the issue will be available at auction.

To provide a reasonable approximation of the SOMA holdings on any given day, the FRBNY publishes SOMA holdings once a week on the FRBNY external web site. In addition, Federal Reserve primary market purchases 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.

As would be expected, securities held as collateral in repurchase or securities lending operations are not available for lending.

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 the Fedline system.

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 0.75 percent. There is no maximum bid rate. For purposes of bidding, a "0" should be entered before the decimal place for bids of less than 1.00 percent.

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 a timely manner after the auction is complete, 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 Primary Dealer help desk at 877-376-9837 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.

Fees and Settlement:

How are collateral pledges handled?

The FRBNY Securities Services and Settlements staff 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 the FRBNY Securities Services and Settlements personnel as soon as possible via their direct lines, or at 212-720-5838, as failure to collateralize a loan will result in heavy penalties.

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 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 Securities Services and Settlements personnel 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 FRBNY if they are unable to deliver the pledged Treasury collateral ag