CUSIP aggregation is a process through which a number of existing MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae (agency MBS) with similar characteristics, including uniform agency backing, coupon, and original term to maturity, are consolidated into a larger pass-through security. The aggregated CUSIP securities are similar to those agency MBS being consolidated, except that the aggregated CUSIP securities represent groups of agency MBS, which themselves represent groups of residential mortgages that conform to specified requirements. The cash flows from the underlying agency MBS provide the cash flows for the aggregated CUSIP. This aggregation service is offered by Fannie Mae, Freddie Mac, and Ginnie Mae. At this time, the Desk plans to aggregate the Federal Reserve’s MBS backed by Fannie Mae and Freddie Mac, but does not plan to aggregate MBS backed by Ginnie Mae.
What is a CUSIP?
A CUSIP is a unique security identifier developed by the Committee on Uniform Security Identification Procedures.
What are the benefits of CUSIP aggregation?
CUSIP aggregation is commonly used by market participants to more efficiently manage agency MBS portfolios. Specifically, CUSIP aggregation simplifies back-office operations and reduces operational risks and costs associated with holding a large number of individual agency MBS CUSIPs.
The Federal Reserve currently holds more than 44,000 individual agency MBS CUSIPs in the System Open Market Account. The CUSIP aggregation process will reduce the number of CUSIPs to less than 10,000. This process is expected to reduce some of the administrative costs and operational challenges associated with the Federal Reserve’s agency MBS portfolio.
Because all of the payments of the underlying agency MBS flow through to the aggregated CUSIPs, the aggregation process will not otherwise affect the size or characteristics of the SOMA portfolio.
Does CUSIP aggregation imply anything about the Federal Reserve’s future plans related to agency MBS or broader monetary policy actions?
No. CUSIP aggregation is a matter of prudent portfolio administration by the New York Fed, and no inference should be drawn about the timing or nature of any future plans related to the Federal Reserve’s agency MBS portfolio or broader monetary policy actions.
Will CUSIP aggregation affect any of the characteristics associated with the SOMA’s agency MBS portfolio?
Because all of the payments of the underlying agency MBS flow through to the aggregated CUSIPs, this process will not affect the overall size or characteristics of the SOMA portfolio. However, by reducing the number of individual agency MBS CUSIPs held by the Federal Reserve, CUSIP aggregation will enable a simplification of back-office operations and reduce the operational risks and costs associated with holding a large number of individual agency MBS CUSIPs.
What is the Desk’s CUSIP aggregation strategy?
Agency MBS with the same agency backing, coupon, and original term to maturity will be aggregated by grouping together securities with other similar characteristics. Pools with lower original loan balances (backed by mortgage loans with an original face value at or below $150,000) will first be separated from pools with higher original loan balances. Cohorts in each of these categories will then be segmented by weighted-average loan age (WALA). Seasoned agency MBS pools (with WALAs that align with years prior to 2007) will be grouped by year. Newer pools (with WALAs that align with years 2007 and later), which represent a greater proportion of the Federal Reserve’s agency MBS holdings, will be grouped by calendar quarter. In the event a new CUSIP would be particularly large (over $20 billion), cohorts may be segregated into monthly groupings. In cases where cohorts would not be of sufficient size to warrant aggregation, such as those with fewer than 35 CUSIPs or less than $100 million in current face value, cohorts may remain un-aggregated.
Cohorts based on other underlying pool characteristics, including those with mortgages backed only by properties in a particular state or those with mortgages backed only by investor properties, may be created on a very limited basis. In cases where the size of such cohorts is too small and does not meet the size threshold described above, these pools may be included in broader cohorts according to WALA, as described previously. Pools comprised of combinations of interest-only and principal-only MBS will remain
un-aggregated in order to prevent the erosion of the premium associated with this type of security.
The Desk’s CUSIP aggregation strategy as described above may be modified, as needed, over time.
What were the key considerations in determining this strategy?
The aggregation process was designed to reduce some of the administrative costs and operational challenges associated with the Federal Reserve’s agency MBS portfolio using a straightforward and rule-based approach that is consistent with market functioning objectives and standard market practices. In addition, the approach was designed such that similar agency MBS pools will be aggregated together. This decision is intended to avoid any reduction in value that could potentially occur if securities with dissimilar characteristics were aggregated together.
When will the CUSIP aggregation process begin, and how often will CUSIP aggregations take place?
The Desk plans to begin CUSIP aggregation in January 2011 and anticipates conducting CUSIP aggregation periodically each month. It is anticipated that the aggregation process will likely extend through 2011.
How will the public be informed of aggregated agency MBS holdings?
The New York Fed publishes detailed data on all settled SOMA agency MBS holdings on its public website on a weekly basis. As CUSIP aggregations take place, this weekly publication will include a listing of the individual agency MBS CUSIPs underlying each aggregated CUSIP. Other changes in the composition and size of these reported holdings over time may result from paydowns or any transaction-related activity.
In addition to publishing the updated holdings information on the New York Fed website, Fannie Mae and Freddie Mac provide information about aggregated CUSIPs, including the underlying agency MBS, on their public websites.
Will information about the agency MBS underlying the Federal Reserve’s aggregated CUSIPs remain available to the public?
Information about individual agency MBS CUSIPs underlying the Federal Reserve’s aggregated CUSIPs will remain available on Fannie Mae and Freddie Mac’s public websites. In addition, the New York Fed will include a listing of the individual agency MBS CUSIPs underlying each of its aggregated CUSIPs in the agency MBS holdings report published on its public website each week.