The following frequently asked questions (FAQs) provide further information about the Federal Reserve Bank of New York’s (New York Fed) plans to consolidate certain agency mortgage-backed securities (MBS) that are held in the System Open Market Account (SOMA) through a process called CUSIP aggregation.
Effective February 22, 2019
What is a CUSIP?
A CUSIP is a unique security identifier developed by the Committee on Uniform Security Identification Procedures.
What is CUSIP aggregation?
Agency MBS CUSIP aggregation is a process through which a number of existing MBS CUSIPs issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae (agency MBS) with similar characteristics, such as coupon and original term to maturity, are consolidated into a larger pass-through security. The aggregated CUSIP securities are similar to those agency MBS being consolidated, except that the aggregated CUSIP securities represent groups of agency MBS, which themselves represent groups of residential mortgages that conform to specified requirements. The cash flows from the underlying agency MBS provide the cash flows for the new aggregated CUSIP so the overall size and characteristics of SOMA MBS portfolio remain unchanged. This aggregation service is offered by Fannie Mae, Freddie Mac, and Ginnie Mae.
What are the benefits of CUSIP aggregation?
CUSIP aggregation is commonly used by market participants to more efficiently manage agency MBS portfolios. Specifically, CUSIP aggregation simplifies back-office operations and reduces operational risks and administrative costs associated with holding a large number of individual agency MBS CUSIPs.
The Federal Reserve has previously engaged in CUSIP aggregation, including two rounds of Fannie Mae and Freddie Mac aggregations which began in 2011 and 2015. Together, these aggregation programs have reduced the number of individual CUSIPs in the SOMA portfolio by over 100,000.
Does CUSIP aggregation imply anything about the Federal Reserve’s future plans related to agency MBS holdings or broader monetary policy actions?
No. CUSIP aggregation is a matter of prudent portfolio administration by the New York Fed, and no inference should be drawn about the timing or nature of any future plans related to the Federal Reserve’s agency MBS portfolio or broader monetary policy actions.
Will CUSIP aggregation interfere with Federal Reserve reinvestments of agency MBS?
No. CUSIP aggregation and reinvestments can be conducted simultaneously.
Will CUSIP aggregation affect any of the characteristics associated with the SOMA’s agency MBS portfolio?
No. Cash flows on the underlying agency MBS flow through to the aggregated CUSIPs, so CUSIP aggregation will not affect the size or characteristics of the SOMA portfolio.
What is the Desk’s CUSIP aggregation strategy?
Fannie Mae and Freddie Mac
For Fannie Mae and Freddie Mac MBS, the Desk will filter along five criteria: Pool category, vintage, agency, coupon, and original term to maturity. Pools backed by mortgages issued in Puerto Rico are first separated out from the rest of the portfolio, followed by pools with lower original loan balances, then by pools backed by mortgages issued in the state of New York, and then by pools of mortgages originated as part of the Home Affordable Refinance Program (HARP), which have high loan-to-value (LTV) ratios. These types of pools are commonly referred to as “story pools” in the agency MBS market. These four story pool categories are handled separately from “no story pools” (that is, those that do not qualify for any of the four story pool categories). The majority of SOMA holdings fall into the no-story-pool category.
Both story and no story pools are then filtered by agency, coupon, original term to maturity, and the year in which the underlying mortgages were securitized into MBS, also known as the vintage. Older cohorts are grouped together by year produced, while newer cohorts (which make up the bulk of SOMA holdings) are grouped by quarter and year produced. For certain cohorts where holdings are relatively low, pools are aggregated together by agency and coupon only.
Once the above filtering process is complete, cohorts must meet two additional requirements before they can be aggregated. First, all potential aggregated pools must have a current face value of at least $110 million. Second, all potential aggregated pools must contain at least 45 underlying CUSIPs.
Any aggregated CUSIPs that do not meet these minimum requirements may be created, when possible, using a less stringent filtering scheme. The resulting aggregations would be less homogenous than those created in the strategic aggregation process, but nonetheless help consolidate the portfolio and reduce administrative costs.
Ginnie Mae
For Ginnie Mae MBS, the Desk’s aggregation program will include only securities issued under the Ginnie Mae I program. Ginnie Mae II securities, on the other hand, will be excluded from the aggregation program given that they are already securitized in such a way as to minimize the need for aggregation. In addition, story pools – including pools backed by mortgages issued in Puerto Rico and New York, and pools with lower original loan balances – will also be excluded from the Ginnie Mae aggregation program.
The remaining no story pools, which make up the majority of SOMA Ginnie Mae I holdings, will be filtered by coupon and vintage. In contrast to Fannie Mae and Freddie Mac aggregations, most of these pools will then be grouped together and aggregated based only on their coupon. For example, all no story vintages of 30-year Ginnie Mae I securities with a 3.5 percent coupon will be aggregated into a single CUSIP. Under this approach, the Desk expects to consolidate approximately 8,000 individual CUSIPs into about 8 aggregated ones.
The Ginnie Mae CUSIP aggregation program is expected to begin in March 2019 and be completed over the course of several months.
What were the key considerations in determining the Desk’s strategy?
The aggregation process was designed to reduce administrative costs and operational complexities associated with the Federal Reserve’s agency MBS portfolio using a straightforward and rules-based approach that is consistent with market functioning objectives and standard market practices. The Desk’s CUSIP aggregation strategy as described above may be modified, as needed, over time.
How will the public be informed of aggregated agency MBS holdings?
The New York Fed publishes detailed data on all settled SOMA agency MBS holdings on its public website on a weekly basis. As CUSIP aggregations take place, this weekly publication will include a listing of the individual agency MBS CUSIPs underlying each aggregated CUSIP. Other changes in the composition and size of these reported holdings over time may result from paydowns or any transaction-related activity.
In addition to publishing the updated holdings information on the New York Fed website, Fannie Mae, Freddie Mac, and Ginnie Mae provide information about aggregated CUSIPs, including the underlying agency MBS, on their public websites.
Will information about the agency MBS underlying the Federal Reserve’s aggregated CUSIPs remain available to the public?
Yes. Information about individual Fannie Mae, Freddie Mac, and Ginnie Mae agency MBS CUSIPs underlying the Federal Reserve’s aggregated CUSIPs will remain available on these organizations’ public websites. In addition, the New York Fed will include a listing of the individual agency MBS CUSIPs underlying each of its aggregated CUSIPs in the agency MBS holdings report published on its public website each week.
