Effective September 4, 2020
The following frequently asked questions (FAQs) provide further information about the Federal Reserve’s operations in agency commercial mortgage-backed securities (agency CMBS).
How does the Desk intend to implement the FOMC’s plan to purchase agency CMBS?
Effective June 11, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of agency CMBS at least at the current pace to sustain the smooth functioning of the agency CMBS market, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Desk will reinvest all principal payments from the Federal Reserve’s holdings of agency CMBS in agency CMBS. For the most recent Desk Statement regarding agency CMBS purchases, see here.
How will the Desk communicate its agency CMBS purchase amounts and schedule?
The Desk will publish its tentative operation schedule—including upcoming operation dates, the time offers are due to the investment manager, security type and maximum purchase amount—in advance, typically the Friday before the coming week’s operation(s). The operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alter its guidance to the Desk.
How much will the Desk purchase in agency CMBS and how often will purchases take place?
At its June meeting, the FOMC directed the Desk to increase the SOMA holdings of agency CMBS at least at the current pace. Consistent with the FOMC directive, the Desk plans to increase SOMA holdings of agency CMBS at this pace by conducting weekly operations of approximately $250 to $500 million. Actual purchase amounts may be less than these operation sizes and accepted offers in operations will continue to depend on the reasonableness of prices. In addition to purchases that increase SOMA holdings of agency CMBS, the Desk will reinvest all principal payments from the Federal Reserve’s holdings of agency CMBS in agency CMBS. The Desk is prepared to increase the size and adjust the composition of its purchase operations as needed to sustain the smooth functioning of the agency CMBS market.
What types of agency CMBS will the Desk purchase?
The Desk will purchase in the open market agency CMBS secured primarily by multifamily home mortgages that are guaranteed fully as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae and that the Desk has determined are suitable for purchase.
How will agency CMBS purchases be conducted?
On March 24, 2020, the New York Fed retained BlackRock Financial Markets Advisory as a third-party vendor to operationalize these purchases and transact with approved counterparties on behalf of the SOMA. BlackRock was selected on a short-term basis to serve as an investment manager after considering their expertise in trading and analyzing agency CMBS in the secondary market, and robust operational and technological capabilities.
The details for each operation will be disclosed at least one day prior to the operation. The Desk, through its investment manager, will solicit offers from approved counterparties to purchase agency CMBS. Operations will be conducted using multiple-price, competitive operations with approved counterparties. A "multiple-price" operation is one in which the same security can be awarded at different prices, with awards given to participants at a price corresponding with an individual offer submitted to the operation. The minimum lot size per CUSIP will be indicated in each operation announcement. Offers will be evaluated for reasonable pricing and only the most competitive offers will be accepted. The purchase amount of agency CMBS will be based on the current face value of accepted securities. The term sheet for agency CMBS purchases can be found here.
How will the Desk communicate the operation results?
Results from agency CMBS operations will be posted on the New York Fed’s website following each operation. The information posted will include the total amount of offers received per operation, the total amount of offers accepted per operation, the security type, and the operation date. In addition, participating counterparties will receive the operation results, including their accepted offers, through the investment manager following the close of the operation.
How will SOMA holdings of agency CMBS be reported?
Currently, settled agency CMBS holdings, at the CUSIP level, are reported on a weekly basis on the System Open Market Account Holdings of Domestic Securities webpage.
Total agency CMBS holdings will be reported after settlement occurs as part of the MBS line in table 1 on the H.4.1. statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks."
Will the Desk release operation pricing results?
Yes. In order to ensure the transparency of its agency CMBS transactions, the Desk will continue to publish historical operation results at mid-month for the prior monthly period. 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.
Who is an approved counterparty?
Approved counterparties include a subset of the primary dealers as well as other dealers who have applied for and received approval. On September 4, the New York Fed announced an expansion of approved counterparties in order to broaden access to the operations and increase the New York Fed’s operational capacity and reach into the agency CMBS market.
Who is eligible to become an approved counterparty?
All primary dealers are eligible. All non-primary dealers who meet the following criteria are eligible:
- Be a U.S. broker-dealer registered with the Securities and Exchange Commission (SEC) and regulated as a member of the Financial Industry Regulatory Authority (FINRA).
- Have net regulatory capital of at least $1 million and a minimum shareholders’ equity of $1 million, as of the date of submission of the expression of interest form.
- Be able to demonstrate an active and established business presence in agency CMBS.
- A firm may demonstrate an “active” business presence by having transacted in agency CMBS over the last year, preferably at volumes consistent with or above the prior two years. Applicants that have not been active or show a substantial drop-off in activity over the last year may either be rejected or be offered the opportunity to explain the decision to apply if they once had a sizeable presence prior to a year ago.
- A firm may demonstrate an “established” presence by having been active in agency CMBS for at least 3 years.
- Maintain sound organizational and satisfactory governance practices, financial condition, regulatory condition and internal controls.
- Be able to demonstrate good faith efforts to support equal opportunity and diversity, including promoting the fair inclusion of women, minorities and veterans in the firm’s workforce, consistent with law.
- “Good faith efforts” means efforts to identify and, if present, remove barriers to minority, women and veteran employment or to expand employment opportunities for minorities, women and veterans within the workforce such as expanding applicant pools through recruiting or advertising.
- Be willing to carry out the responsibilities associated with the role, including by responding promptly and completely during the course of the application review and in the execution of counterparty duties.
How will the New York Fed determine which firms to approve as counterparties?
Selection remains within the New York Fed’s discretion and decisions regarding selection will be made based on the factors outlined on the expression of interest and described above, considered in their totality. Depending on the level of interest, the New York Fed may not be able to add all interested firms as counterparties at any one time. In such cases, potential counterparties will be prioritized based on their ability to add operational capacity (e.g., handling large customer volumes) and/or expand the access and reach of the operations (e.g., firms with geographic, industry or customer focus that expands the reach of the operations).
How will the New York Fed include smaller firms and minority-, women-, and veteran-owned business entities in supporting the agency CMBS purchases?
The New York Fed is committed to diversity and inclusion in all aspects of its business and to the advancement of these values through our implementation of agency CMBS purchases. Smaller firms and minority-, women-, and veteran-owned business enterprises are encouraged to express their interest in serving in a counterparty capacity.
All firms submitting an expression of interest are expected to provide information about their efforts to support equal opportunity and diversity, including the fair inclusion of women, minorities and veterans in their workforces.
What will approved counterparties be expected to do?
Approved counterparties will be expected to meet all of the requirements of the role. For more information on the duties of a counterparty, please see the Expression of Interest Form.
Will the New York Fed disclose the counterparties that it has approved?
Yes. The New York Fed intends to make the names of the additional counterparties public on the New York Fed website.
Do primary dealers need to submit an Expression of Interest?
No. Primary dealers do not need to submit an Expression of Interest to be eligible. The operations initially relied upon the New York Fed’s existing primary dealer relationships as counterparties in order to expedite the implementation of the facilities. Now, the New York Fed seeks to expand the counterparty base to include non-primary dealers. Primary dealers are still subject to program requirements.
Will selection as a counterparty guarantee the ability to participate in any other market operations of the New York Fed?
No. Selected participants will only be able to act as counterparty for agency CMBS transactions and not for any other market operations of the New York Fed or the 13(3) facilities. Firms will need to apply to be considered for other market operation counterparty roles or 13(3) facility counterparty or agent roles.
