The following frequently asked questions (FAQs) provide further information about the Federal Reserve's secondary market operations in agency mortgage-backed securities (MBS). The Desk is currently directed to reinvest into agency MBS principal payments of agency MBS and debt that exceeds $35 billion per month. In addition, the Desk is directed to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. Further, the Desk will undertake small value open market transactions from time to time for the purpose of testing operational readiness to implement existing and potential policy directives.
Effective February 22, 2023
How is the Desk implementing the FOMC’s directive for agency MBS reinvestments?
On May 4, 2022, the Federal Open Market Committee (FOMC) decided to begin reducing its holdings of agency debt and agency mortgage-backed securities (MBS) and Treasury securities as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet. Specifically, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to reinvest into agency MBS the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received each month that exceed the cap amount for that month. If the anticipated amount of principal payments is lower than the cap in effect that month, then the Desk will not reinvest those principal payments. For the schedule of monthly caps, see: https://www.newyorkfed.org/markets/opolicy/operating_policy_220504.
How will the Desk determine the amount of funds to reinvest each month and how will this be communicated?
The Desk will calculate the agency MBS reinvestment amount by subtracting the monthly cap from the amount of expected principal payments from agency debt and agency MBS to be received during a calendar month. Agency commercial mortgage-backed securities (agency CMBS) principal payments continue to not be reinvested and will not be considered in the calculation of the reinvestment amount. The Desk will communicate its planned monthly reinvestment amount here, on or around the ninth business day of each month and will release tentative schedules of reinvestment operations twice a month here, on or around the ninth and the nineteenth business days. The tentative schedule will include information on the upcoming operation dates, times, security types (agency and coupon) and reinvestment amounts. The tentative operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alters its guidance to the Desk.
As an example, consider the situation where a given month’s cap is $35 billion and that the principal payments to be received from agency debt are $2 billion and the anticipated principal payments to be received from agency MBS are $35 billion. To determine the amount of agency MBS reinvestments, the Desk will subtract the $35 billion cap from the total principal payments of $37 billion ($2 billion from agency debt and $35 billion from agency MBS). An announcement will be made on or around the ninth business day of that month indicating that the Desk will reinvest $2 billion of agency MBS, with operations starting on the following business day and running through the ninth business day of the following month.
The reinvestment amount reflects 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 reinvestments may deviate slightly from the stated reinvestment amount due to operational reasons. The Desk will not make adjustments for these deviations in future months’ reinvestments.
When monthly principal payments from agency debt and agency MBS fall below the cap, will the Desk conduct small value agency MBS operations?
Yes. The New York Fed undertakes certain small value open market transactions for the purpose of testing operational readiness to implement existing and potential policy directives from the Federal Open Market Committee (FOMC). For operational readiness reasons, the Desk plans to conduct small value purchases and sales in agency MBS in certain monthly periods in which principal payments fall below the cap. These operations will be conducted approximately every other month and in amounts of up to $150 million in a given month. The Desk may also conduct small value dollar roll and coupon swaps of unsettled MBS purchases.
Small value operations are conducted for the purpose of maintaining operational readiness, rather than to fulfill a policy directive, and therefore do not indicate anything about the future timing or direction of changes in policy. The Desk executes these operations pursuant to the FOMC’s Authorization and its Continuing Directive for Domestic Open Market Operations.
How does the Desk communicate its small value outright operations?
The Desk will communicate its planned monthly small value operation amount here and release its tentative schedule of operations here on or around the ninth business day of each month in which it plans to operate.
In what types of agency MBS will operations be conducted?
The Desk’s agency MBS transactions are only in agency MBS guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Agency MBS reinvestment operations will be conducted in the secondary market and will generally be concentrated in recently produced coupons in 30-year and 15-year fixed rate To-Be-Announced (TBA) securities. The Desk may conduct reinvestment operations in other agency MBS if market conditions warrant. Small value transactions in Agency MBS may be conducted in TBA or specified pools.
How will agency MBS operations be conducted?
The Desk will conduct operations in agency MBS in the secondary market 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 the same security can be awarded at different prices, with awards given to participants at a price corresponding with an individual propositions submitted to the operation. The minimum auction amount, proposition size, and proposition increment are each $1 million. Participants can submit up to ten proposition per security, with each proposition reflecting a price and par amount. Propositions in FedTrade operations will be evaluated based on their proximity to prevailing market prices at the auction close.
Will the Federal Reserve conduct agency MBS dollar rolls or coupon swaps?
The Desk may use dollar roll and coupon swap transactions if needed to facilitate settlement associated with its unsettled agency MBS purchases. A dollar roll is a transaction that generally involves the sale of agency MBS for delivery in one month with the simultaneous agreement to purchase agency MBS, with the same agency, tenor and coupon, for delivery in a different month. A coupon swap is a transaction that involves the sale of one agency MBS and the simultaneous purchase of another agency MBS, each with different agencies, coupons, and/or tenors.
The Desk would conduct dollar roll and coupon swap transactions via Tradeweb, a commercial trading platform. Transactions conducted over Tradeweb would be executed through a competitive bidding process in line with standard market practices.
Under what circumstances may the Federal Reserve conduct agency MBS dollar rolls?
Based on the directive from the FOMC, the Desk may conduct dollar rolls in order to facilitate settlement associated with the Federal Reserve’s agency MBS transactions. Selling dollar rolls effectively postpones the settlement of outstanding forward purchase commitments, while buying dollar rolls effectively brings settlement forward. 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. The Desk may conduct dollar rolls throughout the month, but no later than the morning of two business days before TBA settlement dates—also known as ‘Notification Day’. The amount of dollar rolls conducted may vary throughout the month depending on movements in implied financing rates.
Under what circumstances may the Federal Reserve conduct agency MBS coupon swaps?
Based on the directive from the FOMC, the Desk may conduct coupon swaps in order to facilitate settlement associated with the Federal Reserve’s agency MBS transactions. However, the Desk does not anticipate conducting such transactions unless market conditions suggest that transactions are unlikely to be settled for quite some time, as suggested by dollar-roll implied financing rates that are persistently below the general level of short-term interest rates, prolonged fails, or other market functioning indicators.
Would agency MBS dollar roll or coupon swap transactions change the total size of the Federal Reserve’s agency MBS holdings?
No. Dollar roll and coupon swap transactions are the simultaneous sale and purchase of the same face amount of agency MBS. Thus, they only affect the timing or composition of the settlement of the Federal Reserve's agency MBS holdings.
How will the Desk communicate operation results?
Operation results from FedTrade will be posted on the New York Fed’s website here following each operation. The information posted will include the total amount of propositions received per auction, the total amount of propositions accepted per auction, the total amount accepted per security, and the settlement month. In addition, participating dealers will receive the operation results, including their accepted propositions, via FedTrade, immediately following the close of the auction.
Operation results for dollar rolls and coupon swaps done over Tradeweb will be posted on the New York Fed’s website here at the end of each day that these transactions were conducted. The information posted will include the operation type and the total amount of securities purchased and the total amount of securities sold that day. Prior to January 29, 2021 the Desk only published Tradeweb transactions as part of the Agency Transaction Summary that was published weekly here. Daily reporting of Tradweb transactions makes this weekly reporting redundant and therefore it has been discontinued.
Will the Desk release operation pricing results?
Yes. In order to ensure the transparency of its agency MBS transactions, the Desk, at mid-month for the prior monthly period, will continue to publish historical operation results. This information will include the transaction prices in individual FedTrade operations, dollar rolls, and coupon swaps as well as transactions related to small value exercises. 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.
How are the System Open Market Account (SOMA) holdings of agency MBS 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 Table 3 entitled "Supplemental Information on Mortgage-Backed Securities." Trade settlements may occur well after trade execution due to agency MBS settlement conventions. 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 sales, CUSIP aggregation, dollar roll, and coupon swap activity.
What explains changes in the total current face value of agency MBS held in the SOMA?
The total current face value of agency MBS held in the System Open Market Account (SOMA) will increase, stay the same or decrease over time depending on the current stance of monetary policy. Reported holdings will also fluctuate due to the difference in timing between the settlement of transactions and the receipt of principal payments for agency debt and agency MBS.
The Federal Reserve Bank of New York’s primary dealers are eligible to transact in agency MBS operations directly with the Federal Reserve. Dealers are expected to submit bids or offers for themselves and for their customers.
Whom should dealers call if they experience difficulties during a FedTrade operation?
Primary dealers may call the New York Fed's Trading Desk with submission and verification questions. For FedTrade system-related problems, dealers may call the New York Fed's Primary Dealer Support line.
Does the Federal Reserve assess the TMPG agency MBS fails charge?
Yes. Effective 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 has resulted in the Federal Reserve assessing the applicable agency MBS fails charge recommended by the Treasury Market Practices Group (TMPG). Additional information can be found here.
Does the Federal Reserve require the posting of margin for unsettled agency MBS trades?
Yes. The Federal Reserve requires counterparties to post margin to the New York Fed. Counterparties post initial margin, currently 2.5 percent, and then variation margin is calculated on a daily basis. Margin serves to protect the New York Fed from counterparty credit risk exposure arising from the unsettled agency MBS TBA trades. The New York Fed may periodically make changes to the initial margin rate as appropriate.
What is CUSIP Aggregation?
CUSIP aggregation is a process through which a number of existing MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae with similar characteristics, including uniform agency backing, coupon, and original term to maturity, are consolidated into a larger pass-through security. The aggregated CUSIPs are similar to those agency MBS being consolidated, except that the aggregated CUSIP 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 aggregated CUSIP. Additional information about CUSIP Aggregation can be found on the Agency MBS CUSIP Aggregation FAQ page.
