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Rob's 2000 Notes

🧠 The Open Market Account Desk

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This “Extra” page complements Bruce’s presentation with information beyond what is covered in lecture. It contains information that may not explicitly appear on tests, but may improve overall understanding. “Extra” information like this is generally added in response to frequent student questions or because there are topics I think you would be glad you learned about.

Open Market Operation trades are executed by the Open Markets Desk at the New York Fed. The desk executes trades with a small group of elite bond dealers known as the Primary Dealers.* These are the same bond dealers that are eligible to buy bonds in the “Primary” market directly from the treasury.

A security dealer is like a supermarket. It keeps an inventory of various securities so that, at any point, they can either buy or sell those securities, depending on what their customer requests. In this case, their customer is the Open Markets Desk.

The Fed announces the securities it plans to purchase or sell in advance. The primary dealers connect to the Fed via FedTrade, the Desk’s proprietary trading system. FedTrade uses multiple-price auctions to promote competitive bidding between the various Primary Dealers. (A “multiple-price” auction is an auction in which securities are awarded at the price corresponding to the participant’s offer in the operation, resulting in the security being awarded at multiple prices. Participants can submit up to nine offers per security, with each offer reflecting both a price and par amount.) Primary dealers are expected to participate in open market operations consistently and competitively, in a variety of market environments, to support the implementation of monetary policy.

Fed traders evaluate the offers by comparing them to prevailing market prices at the end of the auction and using a proprietary model. The Fed then notifies winning bidders via FedTrade and posts aggregate results on its website. Two years later, the Fed releases the exact winning bids.

I’ve pasted example winning bids for January 2, 2020 below.

Trade date

Settlement date

(T+1)

Transaction category

Face

Value

(in $M)

IssuerCoupon & Maturity

CUSIP

Security ID Number

Price per $100 of face value

Accrued interest

(in $)

Par Amount

*Price/100

+ Accrued

Total amt

(in $M)

Counterparty
Jan 02 2020Jan 03 2020Purchase50.0TSY02.875 07/31/25912828Y79106.28906250609,375.0053.7553.8NatWest Markets Securities Inc.
Jan 02 2020Jan 03 2020Purchase70.0TSY02.625 12/31/259128285T3105.1562500015,144.2373.6273.6Morgan Stanley & Co. LLC
Jan 02 2020Jan 03 2020Purchase50.0TSY02.125 11/30/249128283J7102.2226562598,702.1951.2151.2Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase10.0TSY03.000 10/31/259128285J5107.1484375052,747.2510.7710.8Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY01.625 02/15/26912828P4699.351562506,226.221.001.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY01.625 02/15/26912828P4699.3671875031,131.115.005.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY01.625 02/15/26912828P4699.3750000031,131.115.005.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY01.625 02/15/26912828P4699.3906250031,131.115.005.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY01.875 06/30/269128287B0100.78125000772.665.045.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase50.0TSY01.750 07/31/24912828Y87100.50000000370,923.9150.6250.6Bank of Nova Scotia, New York Agency
Jan 02 2020Jan 03 2020Purchase24.0TSY01.625 10/31/26912828YQ799.0781250068,571.4323.8523.8Bank of Nova Scotia, New York Agency
Jan 02 2020Jan 03 2020Purchase50.0TSY01.500 09/30/24912828YH799.35156250194,672.1349.8749.9Nomura Securities International, Inc.
Jan 02 2020Jan 03 2020Purchase40.0TSY02.875 07/31/25912828Y79106.29687500487,500.0043.0143.0BofA Securities, Inc.
Jan 02 2020Jan 03 2020Purchase50.0TSY02.250 11/15/24912828G38102.80468750151,442.3151.5551.6Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY02.875 07/31/25912828Y79106.2656250012,187.501.071.1Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY02.875 07/31/25912828Y79106.2890625060,937.505.385.4Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY02.875 07/31/25912828Y79106.3046875060,937.505.385.4Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY03.000 10/31/259128285J5107.1328125026,373.635.385.4Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY03.000 10/31/259128285J5107.1406250026,373.635.385.4Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase80.0TSY01.625 11/30/26912828YU899.04687500120,765.0379.3679.4TD Securities (USA) LLC
Jan 02 2020Jan 03 2020Purchase43.0TSY02.375 08/15/24912828D56103.25781250391,294.1644.7944.8Goldman Sachs & Co. LLC
Jan 02 2020Jan 03 2020Purchase200.0TSY01.625 11/30/26912828YU899.06640625301,912.56198.43198.4Mizuho Securities USA LLC
Jan 02 2020Jan 03 2020Purchase10.0TSY03.000 10/31/259128285J5107.1562500052,747.2510.7710.8Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase25.0TSY02.250 11/15/24912828G38102.8046875075,721.1525.7825.8Societe Generale, New York Branch
Jan 02 2020Jan 03 2020Purchase25.0TSY02.250 11/15/24912828G38102.8125000075,721.1525.7825.8Societe Generale, New York Branch
Jan 02 2020Jan 03 2020Purchase50.0TSY01.500 09/30/24912828YH799.34375000194,672.1349.8749.9BNP Paribas Securities Corp.
Jan 02 2020Jan 03 2020Purchase10.0TSY01.625 10/31/26912828YQ799.0781250028,571.439.949.9RBC Capital Markets, LLC
Jan 02 2020Jan 03 2020Purchase27.0TSY02.125 07/31/249128282N9102.12109375243,220.1127.8227.8Wells Fargo Securities, LLC
Jan 02 2020Jan 03 2020Purchase50.0TSY02.250 11/15/24912828G38102.80859375151,442.3151.5651.6Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase100.0TSY02.250 11/15/24912828G38102.81250000302,884.62103.12103.1Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase250.0TSY02.125 11/30/249128283J7102.23046875493,510.95256.07256.1Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase50.0TSY02.125 11/30/249128283J7102.2226562598,702.1951.2151.2BMO Capital Markets Corp.
Jan 02 2020Jan 03 2020Purchase40.0TSY02.750 06/30/25912828XZ8105.585937509,065.9342.2442.2BofA Securities, Inc.
Jan 02 2020Jan 03 2020Purchase50.0TSY01.750 07/31/24912828Y87100.48437500370,923.9150.6150.6NatWest Markets Securities Inc.
Jan 02 2020Jan 03 2020Purchase25.0TSY01.500 09/30/24912828YH799.3476562597,336.0724.9324.9HSBC Securities (USA) Inc.
Jan 02 2020Jan 03 2020Purchase46.0TSY01.875 07/31/26912828Y95100.75000000365,625.0046.7146.7Citigroup Global Markets Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY02.875 07/31/25912828Y79106.2812500012,187.501.081.1Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY03.000 10/31/259128285J5107.125000005,274.731.081.1Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY01.625 02/15/26912828P4699.359375006,226.221.001.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY01.625 02/15/26912828P4699.3828125031,131.115.005.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase100.0TSY01.625 11/30/26912828YU899.06250000150,956.2899.2199.2Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase100.0TSY03.000 10/31/259128285J5107.14062500527,472.52107.67107.7NatWest Markets Securities Inc.
Jan 02 2020Jan 03 2020Purchase25.0TSY01.875 07/31/26912828Y95100.74218750198,709.2425.3825.4Societe Generale, New York Branch
Jan 02 2020Jan 03 2020Purchase100.0TSY02.750 06/30/25912828XZ8105.5703125022,664.84105.59105.6J.P. Morgan Securities LLC
Jan 02 2020Jan 03 2020Purchase50.0TSY01.625 05/15/26912828R3699.28125000109,375.0049.7549.8Morgan Stanley & Co. LLC
Jan 02 2020Jan 03 2020Purchase27.0TSY02.625 12/31/259128285T3105.156250005,841.3528.4028.4Citigroup Global Markets Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY01.875 06/30/269128287B0100.75000000154.531.011.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase40.0TSY02.750 06/30/25912828XZ8105.578125009,065.9342.2442.2BofA Securities, Inc.
Jan 02 2020Jan 03 2020Purchase50.0TSY02.625 03/31/259128284F4104.80468750340,676.2352.7452.7Wells Fargo Securities, LLC
Jan 02 2020Jan 03 2020Purchase41.0TSY02.875 05/31/259128284R8106.17578125109,501.3743.6443.6Wells Fargo Securities, LLC
Jan 02 2020Jan 03 2020Purchase25.0TSY07.500 11/15/24912810ES3127.27343750252,403.8532.0732.1Goldman Sachs & Co. LLC
Jan 02 2020Jan 03 2020Purchase1.0TSY01.875 06/30/269128287B0100.76562500154.531.011.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY01.875 06/30/269128287B0100.77343750772.665.045.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY02.875 07/31/25912828Y79106.2734375012,187.501.071.1Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase1.0TSY01.625 02/15/26912828P4699.343750006,226.221.001.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase65.0TSY01.625 11/30/26912828YU899.0625000098,121.5864.4964.5Citigroup Global Markets Inc.
Jan 02 2020Jan 03 2020Purchase61.0TSY02.750 06/30/25912828XZ8105.5937500013,825.5564.4364.4J.P. Morgan Securities LLC
Jan 02 2020Jan 03 2020Purchase1.0TSY01.875 06/30/269128287B0100.75781250154.531.011.0Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase100.0TSY02.125 11/30/249128283J7102.23437500197,404.38102.43102.4Deutsche Bank Securities Inc.
Jan 02 2020Jan 03 2020Purchase5.0TSY02.875 07/31/25912828Y79106.2968750060,937.505.385.4Barclays Capital Inc.
Jan 02 2020Jan 03 2020Purchase75.0TSY02.875 11/30/259128285N6106.50781250200,307.3880.0880.1Wells Fargo Securities, LLC

At the time, the Fed was also doing a small amount of trades in residential Mortgage Backed Securities as part of its quantitative easing program. We will discuss these later when we cover bonds. These are agency debt securities issued by FNMA (conventionally known as Fannie Mae’s).

Trade dateSettlement dateCategory

Operation

type

Face Value ($M)AgencyCouponTermCUSIPPriceAmount Transferred ($M)Counterparty
Jan 3 2020Feb 12 2020PurchaseOutright112.0FNMA3.003001F030629101.632813113.8Goldman Sachs & Co. LLC
Jan 3 2020Feb 12 2020PurchaseOutright300.0FNMA3.003001F030629101.628906304.9Goldman Sachs & Co. LLC
Jan 3 2020Feb 12 2020PurchaseOutright19.0FNMA3.003001F030629101.63281319.3Daiwa Capital Markets America Inc.
Jan 3 2020Feb 12 2020PurchaseOutright74.0FNMA2.503001F02262699.30078173.5Credit Suisse AG, New York Branch
Jan 3 2020Feb 12 2020PurchaseOutright56.0FNMA3.003001F030629101.63281356.9Credit Suisse AG, New York Branch
Jan 3 2020Feb 12 2020PurchaseOutright100.0FNMA2.503001F02262699.29296999.3Morgan Stanley & Co. LLC
Jan 3 2020Feb 12 2020PurchaseOutright82.0FNMA2.503001F02262699.30078181.4Morgan Stanley & Co. LLC
Jan 3 2020Feb 12 2020PurchaseOutright29.0FNMA3.003001F030629101.63281329.5Morgan Stanley & Co. LLC
Jan 3 2020Feb 12 2020PurchaseOutright19.0FNMA3.003001F030629101.63281319.3Citigroup Global Markets Inc.

The following is an account of the Open Markets Desk from Joseph Wang, a former senior trader on it:

The Open Markets Desk

Section titled “The Open Markets Desk”

The Open Markets Desk (“the Desk”) is the Fed’s trading desk. It is primarily responsible for two things: executing open market operations, like quantitative easing, and collecting market intelligence.

The Desk collects market intelligence through a wide network of contacts. Their main contacts are the primary dealers, who are obligated to speak with the Desk as part of their primary dealer responsibilities. On a secondary basis, the Desk speaks with commercial banks, government-sponsored enterprises, hedge funds, pensions funds, corporate treasurers, and small dealers. Generally speaking, most significant players in the financial markets will have a relationship with the Desk. These secondary sources are not obligated to speak with the Desk like the primary dealers are, but they are generally happy to maintain a relationship with the Desk. They understand that the conversations are confidential and are happy to help the Fed carry out its work.

The market intelligence collected by the Desk is disseminated across the Federal Reserve system through brief research notes and daily products. Every day the Desk gives a daily morning call on developments in the financial markets based on what they have seen on Bloomberg and gathered from market contacts. The call is given in the Desk’s briefing room, a large meeting room with a long wooden desk in the middle and seats along the walls. Fed officials throughout the Federal Reserve system are invited to dial in. In times of market stress, these calls are attended by Fed officials at the highest level. After the call, there is a question and answer segment where policy makers ask questions and subject matter experts sitting in the briefing room stand up to answer.

In addition to the daily briefings, Desk subject matter experts periodically publish research notes on developments in their area of expertise. These internally published notes are based on the Fed’s confidential data and market intelligence.

With respect to operations, the Desk is organized by asset classes much like any other trading floor. The primary asset classes are Treasuries, Mortgages, and Money Markets. Within each team, traders operate in a rotational framework, where they have different operational responsibilities each week, and sometimes get a week off to focus on research pieces. This is in part to make sure everyone knows how to conduct each operation and in part to keep staff from getting too bored. One week, a trader could be running the Desk’s reverse repo operation, and the next week, they could be waking up early to publish the Desk’s benchmark reference rates.

When the Fed undertakes quantitative easing (QE) it will announce the quantity, pace, and type of assets it will purchase, but it does not know beforehand how the market will react. This is understandable, as market reactions are very difficult to predict because it is not clear what is already priced into the market. The Fed will size its program based on internal models and try to determine the market’s expectations using surveys of a wide range of market participants. The Fed will then adjust the program on an ongoing basis, mindful of potential side effects such as buying so much of a specific security that normal market functioning is impaired.