Expansion of System Open Market Account (SOMA) securities lending (FRBNY)

The Expansion of System Open Market Account (SOMA) securities lending (FRBNY)

The Federal Reserve expanded the SOMA securities lending by $36 billion (an increase of $2 billion per primary dealer, of which there were 18 as of July 27, 2009). The program provides liquidity for the dealers (large financial companies like JPMorgan Chase and Goldman Sachs) in the event of an emergency. It allows the borrowers to avoid reserve requirements by allowing them to post Treasury securities rather than cash as collateral for loans.

Funding agency and aid type
The funding agency was the Federal Reserve.

Loans of Treasury securities to help liquidity.

Who benefits
Banks and financial companies.

Background
SIGTARP: "“Expansion of System Open Market Account (“SOMA”) Securities Lending — Total Potential Support: $32 Billion Increase in Funding. The System Open Market Account (“SOMA”) was started in 1969, and is managed by FRBNY. The account contains dollar-denominated assets purchased in open market operations, and is a ‘store of liquidity in the event an emergency need for liquidity arises.’ Borrowing is permitted ‘for the purpose of covering an expected fail to receive on the part of a dealer. In order to prevent lending activity from affecting reserves, Treasury securities, rather than cash, are posted with the Federal Reserve as collateral.’ In response to market pressures, the program was expanded on September 23, 2008, to raise the current dealer aggregate limit from $3 billion to $4 billion and raised again on October 8, 2008, to $5 billion per dealer.”"

Federal Reserve (via Prins): "“Loans will be awarded to primary dealers based on competitive bidding in an auction held each day at noon. As with all domestic operations conducted by the New York Fed, the auctions will have a multiple price format. Dealers may submit two bids per issue on as many issues as they choose.”"

Prins: "“In July 2009, the Fed increased its limit for loans of securities to brokers from $3 billion to $5 billion, for a total of $36 billion [PDF] in new lending.”"

Related SourceWatch articles

 * SIGTARP Quarterly Report to Congress July 21, 2009
 * Troubled Asset Relief Program

External resources

 * FRBNY announcements: http://www.newyorkfed.org/markets/sec_announcements.html
 * FRBNY homepage: http://www.newyorkfed.org/markets/securitieslending.html