Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

System Open Market Account

Domestic SOMA Portfolio

Recent Developments

• Between February 29 and March 28, 2012, the System Open Market Account’s (SOMA’s) holdings of Treasury securities were little changed. As purchases and sales of Treasury securities continue under the maturity extension program announced by the Federal Open Market Committee (FOMC) on September 21, 2011, holdings may fluctuate modestly due to differences in the amounts and settlement dates for individual purchase and sale transactions.
• The SOMA’s holdings of agency debt declined slightly between February 29 and March 28, 2012, due to principal payments; holdings of agency mortgage-backed securities (MBS) also decreased. As principal payments from agency debt and MBS are reinvested in agency MBS under the FOMC’s reinvestment policy announced on September 21, 2011, the holdings of agency MBS may vary modestly due to differences between principal payment dates and settlement dates for purchases.

Background

Open market operations (OMOs)—the purchase and sale of securities in the open market by a central bank—are a key tool used by the Federal Reserve in the implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the FOMC. OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York (FRBNY), which acts as agent for the FOMC. The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is granted under Section 14 of the Federal Reserve Act.

OMOs can be divided into two types: permanent and temporary. Permanent OMOs are outright purchases or sales of securities for the SOMA, the Federal Reserve’s portfolio. Permanent OMOs traditionally have been used to accommodate the longer-term factors driving the expansion of the Federal Reserve’s balance sheet, principally the trend growth of currency in circulation. More recently, the expansion of SOMA securities holdings has been driven by large-scale asset purchase programs (LSAPs). Temporary OMOs typically are used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future; under a reverse repo, the Trading Desk sells a security under an agreement to repurchase that security in the future. A repo is the economic equivalent of a collateralized loan; conversely, a reverse repo is the economic equivalent of collateralized borrowing. In both types of transactions, the difference between the purchase and sale prices reflects the interest on the loan or borrowing. The composition of the SOMA is presented in table 2.

Table 2. Domestic SOMA securities holdings
Billions of dollars, as of March 28, 2012

Each OMO affects the Federal Reserve’s balance sheet; the size and nature of the effect depend on the specifics of the operation. The Federal Reserve publishes its balance sheet each week in the H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Consolidated Statement of Condition of Reserve Banks,” available at www.federalreserve.gov/releases/h41/. The release separately reports securities held outright, repos, and reverse repos.

In addition, the Federal Reserve has long operated an overnight securities lending facility as a vehicle to address market pressures for specific Treasury securities. Since July 9, 2009, this facility has also lent housing-related, government-sponsored enterprise (GSE) debt securities that are particularly sought after. Amounts outstanding under this facility are reported weekly in table 1A of the H.4.1 statistical release.

The FRBNY’s traditional counterparties for OMOs are the primary dealers with which the FRBNY trades U.S. government and select other securities.¹ In early 2010, the FRBNY revised its policy regarding the administration of its relationships with primary dealers in order to provide greater transparency about the significant business standards expected of primary dealers and to offer clearer guidance on the process to become a primary dealer. The revised policy offers a more structured presentation of the business standards expected of a primary dealer; a more formal application process for prospective primary dealers; an increase in the minimum net capital requirement, from $50 million to $150 million; a seasoning requirement of one year of relevant operations before a prospective dealer may submit an application; and a clear notice of actions the FRBNY may take against a noncompliant primary dealer.² Since late 2009, the FRBNY has taken steps to expand the types of counterparties for some OMOs to include entities other than primary dealers. Details on the counterparty expansion effort are presented below.

Large-Scale Asset Purchase Programs

In November 2008, the Federal Reserve announced that it would buy direct obligations of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks, and MBS guaranteed by Fannie Mae, Freddie Mac, and the Government National Mortgage Association (Ginnie Mae). The goal of these debt purchases was to reduce the cost and increase the availability of credit for the purchase of houses. In March 2009, the FOMC authorized purchases of up to $1.25 trillion of agency MBS and up to $200 billion of agency direct obligations. Subsequently, in November 2009, the FOMC announced that agency debt purchases would be about $175 billion. This amount, while somewhat less than the previously announced maximum of $200 billion, was consistent with the path of purchases and reflected the limited availability of agency debt.

The Federal Reserve also determined that supporting the MBS “dollar roll” market promoted the goals of the MBS purchase program. Dollar roll transactions consist of a purchase or sale of “to be announced” (TBA) MBS combined with an agreement to sell or purchase TBA MBS on a specified future date. Because of principal and interest payments and, during the time in which transactions were being conducted, occasional delays in the settlement of transactions, the Federal Reserve also holds some cash and short-term investments associated with the MBS purchase program. On June 28, 2010, the Federal Reserve began entering into coupon swaps, which are trades with a single counterparty in which the Federal Reserve agrees to simultaneously sell TBA MBS in one coupon and to buy an equal face value of TBA MBS in a different coupon. MBS dollar roll transactions and coupon swaps are recorded on settlement date and may generate realized gains and losses.

In March 2009, the FOMC announced that it would also purchase up to $300 billion of longer-term Treasury securities to help improve conditions in private credit markets. The Federal Reserve purchased a range of securities across the maturity spectrum, including Treasury Inflation-Protected Securities (TIPS). The bulk of purchases were in intermediate maturities. In August 2009, the FOMC announced that it would gradually slow the pace of these transactions in order to promote a smooth transition in markets as purchases of these Treasury securities were completed. As anticipated, the purchases were completed by the end of October 2009.

The FRBNY announced in August 2009 that it would streamline the set of external investment managers for the agency-guaranteed MBS purchase program, reducing the number of investment managers from four to two. As of March 2, 2010, the FRBNY began to use its own staff on select days to transact directly in the secondary market for agency MBS as part of the FOMC’s LSAPs, consistent with the announcement of November 2009. These changes were not performance-related: the FRBNY had anticipated that it would adjust its use of external investment managers as it gained more experience with the program.

In September 2009, the Federal Reserve began to purchase on-the-run agency debt securities—the most recently issued securities—in order to mitigate market dislocations and promote overall market functioning. Prior to this change, purchases were focused on off-the-run agency debt securities.

On September 23, 2009, the FOMC announced its intention to gradually slow the pace of its purchases of agency-guaranteed MBS and agency debt. In implementing this directive, the Trading Desk of the FRBNY announced that it would scale back the average weekly purchase amounts of agency MBS and reduce the size and frequency of agency debt purchases. As anticipated by the FOMC, these transactions were completed by the end of the first quarter of 2010. As of August 19, 2010, the settlement of all remaining outstanding MBS from these purchases was complete. In January 2011, the FRBNY began a process to streamline the administration of agency MBS held in the SOMA portfolio by consolidating these securities through a service offered by Fannie Mae and Freddie Mac called CUSIP aggregation.

The Federal Reserve’s outright holdings of MBS are reported weekly in tables 1, 3, 8, and 9 of the H.4.1 statistical release. In addition, detailed data on all settled agency MBS holdings, including those that have been aggregated, are published weekly on the FRBNY website at www.newyorkfed.org/markets/soma/sysopen_accholdings.html.

On August 10, 2010, the FOMC announced that the Federal Reserve would maintain the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from agency debt and agency MBS in longer-term Treasury securities.

On November 3, 2010, the FOMC decided to expand its holdings of securities and announced that, in addition to maintaining the existing reinvestment policy, it intended to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

As the FRBNY executed the purchase of additional Treasury securities and the reinvestment plan, as directed by the FOMC in November 2010, it announced the distribution of maturities of securities it planned to purchase. In addition, in order to promote transparency in the market, the FRBNY began publishing the prices at which the securities were purchased at the end of each scheduled monthly purchase period. Finally, to provide operational flexibility and to ensure that it was able to purchase the most attractive securities on a relative-value basis, the FRBNY temporarily relaxed the 35 percent per-issue limit on SOMA holdings under which it had been operating.

On June 22, 2011, the FOMC announced that it would maintain its existing policy of reinvesting principal payments on all domestic securities in the SOMA in Treasury securities. The last purchase under the $600 billion program announced in November 2010 occurred on June 30, 2011.

On September 21, 2011, the FOMC announced that it would extend the average maturity of its holdings of securities—by purchasing $400 billion par of Treasury securities with remaining maturities of 6 years to 30 years and selling an equal par amount of Treasury securities with remaining maturities of 3 years or less—by the end of June 2012. The FOMC also announced that it will reinvest principal payments from its holdings of agency debt and agency MBS in agency MBS. In addition, the FOMC will maintain its existing policy of rolling over maturing Treasury securities at auction. The FRBNY Trading Desk began to execute these directives on October 3, 2011. Additional information on the maturity extension program and the reinvestment of agency securities is available at www.newyorkfed.org/markets/opolicy/operating_policy_110921.html and www.newyorkfed.org/markets/pomo_landing.html.

Reverse Repos

Reverse repos are a tool that could be used to support a reduction in monetary accommodation at the appropriate time. Under a reverse repo, the FRBNY Trading Desk sells a security under an agreement to repurchase that security in the future. A reverse repo is the economic equivalent of collateralized borrowing. The FRBNY periodically conducts these transactions to ensure operational readiness at the Federal Reserve, the major clearing banks, the primary dealers, and other counterparties; the transactions have no material impact on the availability of reserves or on market rates.

These activities with respect to reverse repos are a matter of prudent advance planning by the Federal Reserve. They do not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.

Expanded Counterparties

Since late 2009, the FRBNY has taken steps to expand the types of counterparties for reverse repos to include entities other than primary dealers. This initiative is intended to enhance the Federal Reserve’s capacity to conduct large-scale reverse repo operations to drain reserves beyond what could likely be conducted through primary dealers. The additional counterparties are not eligible to participate in transactions conducted by the FRBNY other than reverse repos.

To date, the FRBNY has initiated three waves of counterparty expansions aimed at domestic money market funds. With each wave, the set of eligibility criteria was broadened to allow more and smaller money market funds to participate as counterparties. With each expansion, the FRBNY published updated eligibility criteria and the Reverse Repurchase Program Form Master Repurchase Agreement for Money Funds, which set out the legal terms and conditions under which the FRBNY and its money market mutual fund counterparties may undertake reverse repos.

In addition, on July 27, 2011, the FRBNY announced that it had accepted two GSEs—Freddie Mac and Fannie Mae—as reverse repo counterparties. On July 28, the FRBNY released the criteria for acceptance of banks and savings associations as counterparties eligible to participate in reverse repos. On December 1, 2011, the FRBNY announced that eight banks had been accepted as reverse repo counterparties and, on December 2, released a second round of criteria for the acceptance of banks and savings associations as reverse repo counterparties. The expanded reverse repo counterparties list is available at www.newyorkfed.org/markets/expanded_counterparties.html.

Each institution accepted as a reverse repo counterparty submitted an application and meets the criteria published by the FRBNY pursuant to the relevant counterparty expansion wave. Acceptance as a counterparty does not constitute a public endorsement by the FRBNY of any listed counterparty and should not substitute for prudent counterparty risk management and due diligence. Further information on reverse repo counterparties is available on the FRBNY’s website at www.newyorkfed.org/markets/rrp_announcements.html.

Transactions

In December 2009, the FRBNY conducted its first set of small-scale, real-value, triparty reverse repos with primary dealers. Additional series of reverse repos have been conducted since 2009, some of which were open to the sets of expanded counterparties (money market mutual funds, GSEs, banks, and savings associations) announced through December 2011.

Additional details and the results of these operations are available on the FRBNY website at www.newyorkfed.org/markets/omo/dmm/temp.cfm. The outstanding amounts of reverse repos are reported weekly in tables 1, 2, 8, and 9 of the H.4.1 statistical release.

Liquidity Arrangements with Foreign Central Banks

Recent Developments

• As presented in table 3, as of March 28, 2012, the amount outstanding under the central bank liquidity swap arrangements has declined significantly to $65.1 billion, comprising $13.5 billion to the Bank of Japan, $51.2 billion to the European Central Bank, and $0.4 billion to the Swiss National Bank. The declines were primarily attributable to decreased demand in rollover auctions from the maturity of 84-day transactions with the European Central Bank and the Bank of Japan originally spanning the 2011 year-end. Detailed information about swap operations is available at www.newyorkfed.org/markets/fxswap/fxswap.cfm.

Background

Because of the global character of bank funding markets, the Federal Reserve has at times coordinated with other central banks to provide liquidity. In December 2007, the Federal Reserve entered into agreements to establish temporary reciprocal currency arrangements (central bank liquidity swap lines) with the European Central Bank and the Swiss National Bank in order to provide liquidity in U.S. dollars. Subsequently, the FOMC authorized swap lines with the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, the Bank of Japan, Danmarks Nationalbank, the Bank of England, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, and Sveriges Riskbank. Two types of temporary swap lines were established: U.S. dollar liquidity lines and foreign currency liquidity lines. These temporary arrangements expired on February 1, 2010.

However, in May 2010, temporary U.S. dollar liquidity swap lines were re-established with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank in order to address the re-emergence of strains in global U.S. dollar short-term funding markets. In December 2010, the FOMC authorized an extension of the arrangements through August 1, 2011. In June 2011, the FOMC authorized another extension of the arrangements through August 1, 2012. On November 30, 2011, the FOMC and these five foreign central banks (FCBs) agreed to reduce the rate on these swap arrangements from the U.S. dollar overnight index swap (OIS) rate plus 100 basis points to the OIS rate plus 50 basis points, and extended the authorization of these swap arrangements through February 1, 2013. In addition, as a contingency measure, the FOMC agreed to establish temporary bilateral liquidity swap arrangements with these five FCBs to provide liquidity in any of their currencies if necessary.

Table 3. Amounts outstanding under dollar liquidity swaps
As of March 28, 2012

The FRBNY operates the swap lines under the authority granted under Section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the FOMC.

Dollar Liquidity Swaps

Dollar liquidity swaps consist of two transactions. When an FCB draws on its swap line with the FRBNY, the FCB transfers a specified amount of its currency to the FRBNY in exchange for dollars at the prevailing market exchange rate. The FRBNY holds the foreign currency in an account at the FCB. The dollars that the FRBNY provides are then deposited in an account that the FCB maintains at the FRBNY. At the same time, the FRBNY and the FCB enter into a binding agreement for a second transaction that obligates the FCB to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. Because the swap transactions will be unwound at the same exchange rate used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate. At the conclusion of the second transaction, the FCB compensates the FRBNY at a market-based interest rate.

When the FCB lends the dollars it obtained by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the FCB account at the FRBNY to the account of the bank that the borrowing institution uses to clear its dollar transactions. The FCB is obligated to return the dollars to the FRBNY under the terms of the agreement. Neither the FRBNY nor the Federal Reserve is counterparty to the loan extended by the FCB. The FCB bears the credit risk associated with the loans it makes to institutions in its jurisdiction.

The foreign currency that the Federal Reserve acquires in these transactions is recorded as an asset on the Federal Reserve’s balance sheet. In tables 1, 8, and 9 of the weekly H.4.1 statistical release, the dollar value of amounts that the FCBs have drawn but not yet repaid is reported in the line entitled “Central bank liquidity swaps.” Dollar liquidity swaps have maturities ranging from overnight to three months. Table 2 of the H.4.1 statistical release reports the maturity distribution of the outstanding dollar liquidity swaps. Detailed information about drawings on the swap lines by the participating FCBs is presented on the FRBNY’s website at www.newyorkfed.org/markets/fxswap.

Foreign Currency Liquidity Swap Lines

On April 6, 2009, the FOMC announced foreign currency liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. These lines were designed to provide the Federal Reserve with the capacity to offer liquidity to U.S. institutions in foreign currency should a need arise. These lines mirror dollar liquidity swap lines, which provide FCBs with the capacity to offer U.S. dollar liquidity to financial institutions in their jurisdictions. Under the foreign currency swap lines established in April 2009, the Federal Reserve had the ability to provide foreign currency-denominated liquidity to U.S. institutions in amounts of up to £30 billion (sterling), €80 billion (euro), ¥10 trillion (yen), and CHF 40 billion (Swiss francs). The Federal Reserve did not draw on these swap lines, and they expired on February 1, 2010.

In November 2011, as a contingency measure, the FOMC agreed to establish temporary bilateral liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank so that liquidity can be provided in any of their currencies if necessary. The swap lines are authorized until February 1, 2013. So far, the Federal Reserve has not drawn on these swap lines. Additional information is available at www.newyorkfed.org/markets/liquidity_swap.html.

1. A current list of primary dealers is available on the FRBNY’s website at www.newyorkfed.org/markets/pridealers_current.html. Return to text

2. More information on the FRBNY’s administration of its relationships with primary dealers—including requirements for business standards, financial condition and supervision, and compliance and controls—is available at www.newyorkfed.org/markets/pridealers_policies.html and www.newyorkfed.org/markets/pridealers_faq_100111.html. Return to text

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