May 1, 2024
The following frequently asked questions (FAQs) provide further information about the Federal Reserve's secondary market transactions in Treasury securities.
What is the current policy directive pertaining to the Desk’s Treasury Outright Operations?
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), beginning in June 2024, to reinvest any principal payments received from agency debt and agency mortgage-backed securities (MBS) holdings in excess of $35 billion redemption cap into Treasury securities. Additionally, the Desk will continue to execute small value purchase and sales operations pursuant to the FOMC’s Authorization and its Continuing Directive for Domestic Open Market Operations.
Why does the Desk conduct small value outright operations in Treasury securities?
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). Small value operations do not indicate anything about the future timing or direction of changes in policy.
How will the Desk determine the amount of funds to reinvest in Treasury securities when MBS paydowns exceed the cap and how will this be communicated?
The amount of monthly reinvestments in Treasury securities will be approximately equal to the amount of principal payments from agency debt and agency MBS holdings anticipated to be received that month that exceed the $35 billion cap. If MBS paydowns exceed the cap, the Desk will publish the amount of Treasury reinvestment purchases on or around the ninth business day of that month. The Desk will also publish a tentative monthly schedule of operations expected to take place between the middle of the month and the middle of the following month that communicates the operation dates, times, security types and maturities, and maximum transaction amounts.
How will the Desk communicate its small value operations plans when agency debt and agency MBS paydowns are below the cap?
The Desk plans to conduct small value outright operations approximately every other month when agency debt and agency MBS paydowns are below the $35 billion redemption cap, in amounts of up to $150 million in a given month. The Desk will communicate its planned monthly small value transaction amount and release its tentative schedule of operations on or around the ninth business day of each month in which it plans to operate. These announcements can be found on the Treasury Securities Operational Details page. The tentative schedule will include information on the upcoming operation dates, times, security types and maturities, and maximum transaction amounts.
If agency debt and agency MBS paydowns are below the cap and the Desk is not conducting small value operations, the Desk will communicate that it will not be conducting any outright operations over that monthly period.
In what Treasury securities will the Desk operate?
The Desk will distribute secondary market Treasury reinvestment purchases across nominal coupons, bills, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs) across a range of maturities to roughly match the maturity composition of outstanding securities.
Treasury small value operations, both purchases and sales, may be conducted across a range of maturities and security types. They may include nominal coupon securities, bills, TIPS and FRNs.
What are the limits on the SOMA holdings of any one Treasury issue?
The Desk will limit SOMA holdings to a maximum of 70 percent of the total outstanding amount of any individual Treasury security.
What are the limits on SOMA purchases of any one Treasury issue?
The Desk allows the share of SOMA holdings of an individual Treasury security to rise above certain levels only in modest increments.
For nominal coupons, TIPS, and FRNs, the Desk allows the share of SOMA holdings of an individual Treasury security to rise above 35 percent in increments, as shown below.
| Purchase Limits for Nominal Coupons, TIPS, and FRNs | ||
SOMA Security Ownership Prior to Operation as a Percentage of Outstanding |
Maximum Purchase Amount per Security in Operation is the Lesser of (A) or (B): | |
| (A) | (B) | |
| 0-30% | N/A | (35% of Outstanding) minus SOMA Holdings |
| 30%-47.5% | 5% of Outstanding | (50% of Outstanding) minus SOMA Holdings |
| 47.5%-59% | 2.5% of Outstanding | (60% of Outstanding) minus SOMA Holdings |
| 59%-70% | 1% of Outstanding | (70% of Outstanding) minus SOMA Holdings |
| Above 70% | Not Eligible for Purchase | |
For bills, the Desk allows the share of SOMA holdings of an individual Treasury security to rise above 17.5 percent in increments, as shown below.
| Purchase Limits for Bills | ||
SOMA Security Ownership Prior to Operation as a Percentage of Outstanding |
Maximum Purchase Amount per Security in Operation is the Lesser of (A) or (B): | |
| (A) | (B) | |
| 0-15% | N/A | (17.5% of Outstanding) minus SOMA Holdings |
| 15%-34% | 2.5% of Outstanding | (35% of Outstanding) minus SOMA Holdings |
| 34%-59.5% | 1% of Outstanding | (60% of Outstanding) minus SOMA Holdings |
| 59.5%-70% | 0.5% of Outstanding | (70% of Outstanding) minus SOMA Holdings |
| Above 70% | Not Eligible for Purchase | |
Does the Federal Reserve lend the Treasury securities it owns?
Yes, Treasury securities held in the SOMA are available to borrow through the SOMA securities lending program. For more information on Securities Lending, please see here.
How are SOMA holdings of Treasury securities reported?
SOMA Treasury holdings are reported on a weekly basis in the H.4.1 statistical release. Over any period, changes in the H.4.1 line item "U.S. Treasury securities" reflect the net effect of rollovers, purchases, and sales of Treasury securities, as well as movements in inflation compensation. For a full list of SOMA holdings, please see here.
Who is eligible to transact in Treasury outright operations with the Federal Reserve?
The New York Fed’s primary dealers are eligible to transact in Treasury outright operations directly with the Federal Reserve. Dealers are expected to submit bids and offers for both themselves and their customers.
How are outright operations conducted?
The Desk conducts Treasury outright operations via FedTrade, the Desk’s proprietary trading system. FedTrade operations are generally conducted using multiple-price, competitive auctions with approved counterparties. A "multiple-price" auction is an auction in which securities are awarded at the price corresponding to the participant’s bid or offer in the operation, resulting in the security being awarded at multiple prices. The minimum auction amount, bid/offer size, and bid/offer increment are each $1 million. Participants can submit up to nine bids or offers per security, with each bid or offer reflecting both a price and par amount. For Treasury bills, bids and offers will be entered as rates, whereas for FRNs, bids and offers will be entered as discount margin.
Propositions in FedTrade operations are evaluated based on their proximity to prevailing market prices at the close of the auction, as well as measures of relative value. Relative value measures are calculated using the New York Fed’s proprietary model.
How will the Desk communicate the operation results?
Operation results will be posted on the New York Fed’s website following each operation. The information posted will include the total amount of propositions received, the total amount of propositions accepted, and the amount purchased or sold per issue. In addition, participating dealers will receive the operation results, including their accepted propositions, via FedTrade, immediately following the close of the auction.
Will the Desk release operation pricing results?
The Desk will publish information on transaction prices in individual operations at mid-month for the prior monthly transaction period following periods in which the Desk conducts outright operations. For each security purchased or sold in each operation, the Desk will release the weighted-average accepted price/rate, the least favorable accepted price/rate, and the proportion accepted of each proposition submitted at the least favorable accepted price/rate.
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.
Whom should dealers call if they experience difficulties during the operation?
Primary dealers may call the New York Fed’s Open Market Trading Desk with submission and verification questions. For system-related problems, dealers may call the New York Fed’s Primary Dealer Support.
When and how does Treasury security settlement take place?
Treasury security settlement typically occurs on a T+1 basis, i.e. one business day after the day of the operation, via the Fedwire Securities System.
Does the Federal Reserve assess the TMPG Treasury fails charge?
Yes. The failure of the Federal Reserve's counterparties to deliver Treasury securities for the contractual settlement date of the Desk's trades has resulted in the Federal Reserve assessing the applicable Treasury fails charge recommended by the Treasury Market Practices Group (TMPG). Additional information can be found here.
