Release Date: December 30, 2008
The Federal Reserve on Tuesday announced that it expects to begin
operations in early January under the previously announced program to
purchase mortgage-backed securities (MBS) and that it has selected
private investment managers to act as its agents in implementing the
Under the MBS purchase program, the Federal Reserve will
purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the
program is being established to support the mortgage and housing
markets and to foster improved conditions in financial markets more
Further information regarding the structure and operation of the MBS
purchase program is provided in the attached set of Frequently Asked
What is the policy objective of the Federal Reserve’s program to purchase agency mortgage-backed securities?
The goal of the program is to provide support to mortgage and
housing markets and to foster improved conditions in financial markets
Why is it necessary for the Federal Reserve to transact in the agency MBS market via external investment managers?
The operational and financial characteristics of MBS purchases
are significantly more complicated than those associated with the
assets that have traditionally been purchased by the Federal Reserve.
The Federal Reserve has chosen external investment managers as a means
of implementing the MBS program quickly and efficiently while at the
same time minimizing operational and financial risks.
Because of the size and complexity of the agency MBS program, a
competitive request for proposal (RFP) process was employed to select
four investment managers and a custodian. The investment managers are
BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington
Management Company, LLP. The selection criteria were based on the
institution’s operational capacity, size, overall experience in the MBS
market and a competitive fee structure. The contract for a custodian is
not yet final.
What securities are eligible for purchase under the program?
Only fixed-rate agency MBS securities guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae are eligible assets for the program.
The program includes, but is not limited to, 30-year, 20-year and
15-year securities of these issuers. The program does not include CMOs,
REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash
equivalents. Eligible assets may be purchased or sold in specified
pools, in “to be announced” (TBA) transactions, and in the dollar roll
What is the investment strategy that will be employed?
Investment managers will employ a passive buy and hold
investment strategy in accordance with investment guidelines prescribed
by the Federal Reserve. Purchases will be guided by commonly referenced
market indices. The agency MBS program will involve the outright
purchase of up to $500 billion in agency MBS by the investment managers
on behalf of the Federal Reserve by the end of the second quarter of
2009. The New York Fed will adjust the pace of its purchases based on
input from the investment managers about market conditions and the
impact of the program. The investment managers will be required to
purchase securities frequently and to disclose the Federal Reserve as
The investment strategy may involve the use of dollar rolls as a
supplemental tool to smooth market supply and demand. A dollar roll is
a transaction involving the sale of agency MBS for delivery in the
current month and the simultaneous agreement to repurchase
substantially similar (although not the same) securities on a specified
Does the agency MBS program expose the Federal Reserve to increased risk of losses?
Assets purchased under this program are fully guaranteed as to
principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so
the Federal Reserve's exposure to the credit risk of the underlying
mortgages is minimal. The market valuation of agency MBS can fluctuate
over time based on the interest rate environment; however, the Federal
Reserve's exposure to interest rate risk is mitigated by the
conservative, buy and hold investment strategy of the agency MBS
When will the purchases begin?
Purchases are expected to begin in early January, 2009.
Who will the investment managers trade with and who is eligible to sell agency MBS to the Federal Reserve under the program?
Initially, the investment managers will trade only with
primary dealers who are eligible to transact directly with the Federal
Reserve Bank of New York. Primary dealers are encouraged to submit
offers for themselves and for their customers.
Will the agency MBS held by the Federal Reserve through this
program be eligible for lending through the Treasury Securities Lending
Facility (TSLF) or the daily System Open Market Account (SOMA)
securities lending operations conducted by the New York Fed?
There are no plans for the agency MBS held by the SOMA to be
available for borrowing through the TSLF or the daily securities
How will purchases under the agency MBS program be financed?
Purchases will be financed through the creation of additional bank reserves.
What is the legal basis for the agency MBS purchase program?
Purchases of agency MBS in the open market, under the
direction of the FOMC, are permitted under section 14(b) of the Federal
How is the Federal Reserve’s agency MBS purchase program related to the U.S. Treasury’s efforts to purchase agency MBS?
The Federal Reserve’s agency MBS program is separate and
distinct from the U.S. Treasury’s program but both programs are aimed
at fostering improved conditions in mortgage markets.
How will holdings under the agency MBS program be reported?
Balance sheet items related to the agency MBS purchase program
will be 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.” There
will be an explanatory cover note on the release when the new items
appear for the first time. However, these data may be published well
after trade execution due to agency MBS settlement conventions. In
addition, the New York Fed will publish the SOMA agency MBS activity in
more detail on its external website on a weekly basis.
What measures will the Federal Reserve take to ensure that
an investment manager implementing the MBS program will not have an
unfair advantage relative to other market participants due to the
information it receives about the MBS program?
Each investment manager will be required to implement ethical
walls that appropriately segregate the investment management team that
implements the Federal Reserve’s agency MBS program from other advisory
and proprietary trading activities of the firm. The New York Fed will
monitor each investment manager’s compliance with this requirement.
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