System Open Market Account

The System Open Market Account consists of the Federal Reserve’s domestic and foreign portfolios. The SOMA domestic portfolio consists of U.S. Treasury securities held on both an outright and a temporary basis. The SOMA foreign currency portfolio consists of investments denominated in euros and yen.

  • The Federal Reserve System Open Market Account (SOMA) is a portfolio of U.S. Treasury securities and other investments denominated in foreign currencies.
  • From 1996 to 2006, the domestic portfolio—including securities held under repurchase agreements—increased from $414.7 billion to $815.7 billion
  • At the end of 2006, the Federal Reserve held $20.5 billion in non-dollar assets denominated in euros and yen.
  • Interest on the portfolio provides virtually all of the Fed’s income; nevertheless, the central bank buys and sells securities purely to implement monetary policy and not for profit.

 

The System Open Market Account consists of the Federal Reserve’s domestic and foreign portfolios. The SOMA domestic portfolio consists of U.S. Treasury securities held on both an outright and a temporary basis. The SOMA foreign currency portfolio consists of investments denominated in euros and yen.

The Federal Open Market Committee (FOMC) has designated the Federal Reserve Bank of New York to execute open market transactions on behalf of the entire Federal Reserve System. The resulting investments are held in the SOMA portfolio.

In addition, while the Treasury, in consultation with the Federal Reserve System, has responsibility for setting U.S. exchange rate policy, the New York Fed is responsible for executing foreign exchange intervention. The U.S. monetary authorities—the Treasury and the Fed—may intervene in the foreign exchange market to counter disorderly market conditions, using funds that belong to the Federal Reserve and to the Exchange Stabilization Fund (ESF) of the Treasury Department.

Open Market Operations
Open market operations, the buying and selling of securities in the marketplace, are one of three basic tools the Federal Reserve uses to conduct monetary policy—that is, influencing the cost and availability of money and credit in the U.S. economy. The other tools are reserve requirements and the discount rate.

To add reserves to the banking system and accommodate the trend growth in currency in circulation, the Federal Reserve purchases government securities. To drain reserves from the banking system and limit the ability of banks to make loans and investments, the Federal Reserve sells securities. The Federal Reserve Act and the Monetary Control Act of 1980 provide the Fed with the authority to exchange maturing securities and to buy and sell obligations of the U.S. government in the open market.

A specified portion of the System’s outright holdings—excluding the effects of temporary transactions—is allocated to each of the 12 Reserve Banks. The percentage allotments of the portfolio are adjusted annually to reflect movements of deposits among Reserve Banks.

Portfolio Design and Management Division
The Portfolio Design and Management Division of the Markets Group at the New York Fed develops and maintains guidelines and portfolio structures for the SOMA domestic and foreign currency portfolios and the ESF foreign currency portfolio. The group also develops and maintains techniques for measuring the performance, behavior, and characteristics of the portfolios and produces management reports on the portfolios.

Portfolio Purpose and Objective
Portfolio management is a dynamic and evolving process. The challenges are to satisfy portfolio objectives and the Fed’s investment principles. The objective of the portfolio is to limit credit risk, maintain a conservative store of liquidity, and minimize any potential impact on normal market dynamics that might arise from portfolio activities. Portfolio benchmarks are used to develop and implement strategy through the choice of optimal assets. The investment policies include consultation with the FOMC and promote safety and competitive pricing to ensure that the portfolios are able to effectively support policy implementation.

Portfolio Value and Composition
Most of the assets in the domestic portfolio are Treasury securities that are held outright. The Federal Reserve also holds government securities on a temporary basis under repurchase agreements and occasionally issues temporary liabilities delivering Treasury securities under reverse repurchase agreements.

The composition and value of the portfolio change as a result of the Fed’s open market operations. Expansion is achieved by outright purchases, mostly in the secondary market from primary dealers, supplemented by some purchases for the SOMA of Treasury bills from foreign central banks and other international institutions that hold accounts with the Federal Reserve. At the end of 2006, the par value of domestic portfolio holdings was $815.7 billion.

The U.S. monetary authorities invest their foreign currency balances in a variety of instruments that yield market-related rates of return and have a high degree of liquidity and credit quality. To the greatest extent practical, the investments are split evenly between the System Open Market Account and the Exchange Stabilization Fund. A significant portion of the U.S. monetary authorities’ foreign exchange reserves is invested in European and Japanese government securities. On an outright basis, the U.S. monetary authorities hold German, French, and Japanese government securities.

At the end of 2006, the SOMA foreign portfolio was $20.5 billion, valued at the current exchange rate, in euros and yen. The SOMA is not marked-to-market, so the value is measured at par each day. However, the foreign exchange component of the foreign exchange reserves is marked-to-market.

The interest received by the Federal Reserve on its portfolio holdings constitutes virtually all of the System’s income. Unlike individuals or private institutions, however, the Fed acquires and sells securities purely to implement monetary policy and not for profit. The interest earned on those holdings is apportioned to the individual Federal Reserve Banks according to the percentage of the portfolio each owns. A portion of the earnings is used for salaries and other operation expenses of the Banks, with a small amount set aside in a surplus account. The remaining income is paid to the U.S. Treasury.

SOMA Manager
The SOMA portfolio is managed on a daily basis. The manager is appointed by the FOMC and customarily is a senior officer of the New York Fed. The account manager attends the FOMC meetings to report on domestic operations, as well as to be fully informed of the discussions leading to the adoption of the committee’s monetary policy directive to the New York Fed.

April 2007

This article has been reprinted with the authorization of the Federal Reserve