Results of Analytical Testing of the Board’s Publicly Reported Data for the Secondary Market Corporate Credit Facility
- Issuer
- Federal Reserve System
- Document type
- Memorandum
- Date
- 2021-07-14
Summary
A memorandum dated July 14, 2021 from a senior OIG manager for information technology to Mark E. Van Der Weide, General Counsel of the Board of Governors of the Federal Reserve System, reporting results of analytical testing of the Board's publicly reported data for the Secondary Market Corporate Credit Facility (SMCCF). The memorandum states that the office identified 12 instances in which CUSIP, coupon and maturity information appears duplicated, affecting 24 transactions in the disclosures for January through April 2021. It explains that most related to partial bond redemptions that were not clearly labeled, and that FRB NY officials attributed three April duplicates to an internal reporting error. It describes steps the Board and FRB NY took and issues no formal recommendations. An attachment table lists the transactions at issue by issuer and CUSIP number.
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Full text
MEMORANDUM
D ATE: July 14, 2021
TO: Mark E. Van Der Weide
General Counsel
Board of Governors of the Federal Reserve System
FROM: Khalid Hasan
Senior OIG Manager for Information Technology
Office of Information Technology
SUBJECT: Results of Analytical Testing of the Board’s Publicly Reported Data for the Secondary
Market Corporate Credit Facility
Executive Summary
We are issuing this memorandum to communicate opportunities to enhance the clarity and transparency
of the Board of Governors of the Federal Reserve System’s publicly reported transaction disclosure data
for the Secondary Market Corporate Credit Facility (SMCCF). Specifically, we identified transactions that
appear to have been documented twice in the publicly reported transaction-specific disclosures
published in April 2021. In addition, we identified instances in each of the publicly reported transaction-
specific disclosures published from January through April 2021 in which transactions for partial bond
redemptions were not clearly labeled and did not include redemption amounts. 1 We identified these
transactions during the survey phase of our ongoing evaluation of third-party cybersecurity risk
management processes for vendors supporting the Main Street Lending Program (MSLP) and the SMCCF.
After informing Board and Federal Reserve Bank of New York (FRB NY) officials of these potentially
duplicate entries, they took immediate steps to strengthen internal review processes to ensure that these
transactions are appropriately recorded in the SMCCF public disclosure data. Additionally, these officials
confirmed that these issues did not result in any numerical inaccuracies in the Board’s public reporting.
This memorandum includes two items for management’s consideration related to enhancing the clarity
and transparency of the Board’s publicly reported transaction disclosure data for the SMCCF. Specifically,
clarifying the public reporting regarding partial redemptions and correcting the identified duplicates
1 These public reports can be found at https://www.federalreserve.gov/monetarypolicy/smccf.htm.
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Mark E. Van Der Weide July 14, 2021
related to bonds that matured could provide the Board with greater assurance that it is meeting the
needs of the public and Congress.
Our final report for this evaluation may include recommendations related to the issues described in this
memorandum. This memorandum is provided for informational purposes, and a response is not required.
Background
In response to the economic effects of the COVID-19 pandemic, the Board established several emergency
lending programs and facilities to provide loans to employers, certain businesses, and communities across
the country to support the U.S. economy. 2 The Coronavirus Aid, Relief, and Economic Security (CARES)
Act authorizes the U.S. Department of the Treasury to invest in these facilities. Section 4026 of the CARES
Act mandates the public reporting of information about the government’s pandemic response.
Specifically, this section requires the Board to provide reports to Congress on outstanding loan and
guarantee programs every 30 days, among other things. 3 These reports are to be publicly released within
7 days of delivery to Congress. 4 To meet CARES Act reporting requirements, the Board provides periodic
updates on each of the lending facilities, including the SMCCF, as required by section 13(3) of the Federal
Reserve Act, at least every 30 days.
Secondary Market Corporate Credit Facility
The Board established two facilities to support credit to large employers: the Primary Market Corporate
Credit Facility (PMCCF) for new bond and loan issuance and the SMCCF to provide liquidity for
outstanding corporate bonds (together, corporate credit facilities, or CCFs). FRB NY established one
special purpose vehicle to manage and operate the CCFs, which ceased purchasing eligible assets on
December 31, 2020. 5 A key purpose of the SMCCF was to support market liquidity by purchasing, in the
secondary market, corporate bonds issued by investment-grade U.S. companies as well as U.S.-listed
exchange-traded funds whose investment objective is to provide broad exposure to the market for
U.S. corporate bonds. Specifically, the Board designed the SMCCF to create a portfolio that tracked a
broad, diversified market index of U.S. corporate bonds.
Objectives, Scope, and Methodology
In February 2021, we announced an evaluation of third-party cybersecurity risk management processes
for vendors supporting the MSLP and the SMCCF. As part of our objective, we plan to evaluate the risk
management processes designed to ensure that effective information security and data integrity controls
2 The Board established these emergency lending facilities under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343).
3 Section 4026 of the CARES Act requires the Board to submit reports on any programs or facilities it establishes to the Senate
Committee on Banking, Housing, and Urban Affairs and the House Financial Services Committee.
4 These public reports can be found at https://www.federalreserve.gov/monetarypolicy/smccf.htm.
5 No transactions occurred under the PMCCF while it was operational. Accordingly, there are no transaction-specific disclosures
for the PMCCF.
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Mark E. Van Der Weide July 14, 2021
are implemented by the third parties supporting the administration of the MSLP and the SMCCF. We are
currently conducting fieldwork to meet this objective.
As part of our planning work, we reviewed the monthly SMCCF transaction-specific disclosures from
January through April 2021. 6 We used an analytics and visualization tool to perform data accuracy and
completeness checks of the transaction-specific disclosure data, such as ensuring that transaction
identifiers were unique. In addition, we met with Board and FRB NY officials to discuss our analysis.
The Clarity and Transparency of Publicly Reported
SMCCF Transaction Disclosure Data Can Be Enhanced
We found that there were transactions that appear to have been recorded twice in each of the
transaction-specific disclosures for the SMCCF for January through April 2021. Specifically, we identified
12 instances in which information in the CUSIP Number, Coupon Rate, and Maturity Date fields appears to
have been duplicated, affecting 24 transactions over the course of these 4 months (table 1). 7
Ta ble 1. Transactions at Issue in the Publicly Reported Transaction Disclosures for the SMCCF
Number of
Total Unique tr ansactions
Report date r ecords CUSIPs affected Explanation
January 11, 2021 1,320 1,317 3 The duplicate CUSIPs represented bonds that were
partially redeemed within the reporting period.
February 9, 2021 1,293 1,291 2 The duplicate CUSIPs represented bonds that were
partially redeemed within the reporting period.
March 11, 2021 1,280 1,279 1 The duplicate CUSIPs represented bonds that were
partially redeemed within the reporting period.
April 12, 2021 1,268 1,262 6 Three of the duplicate CUSIPs represented bonds
that were partially redeemed within the reporting
period; the other three represented bond positions
that matured and were not aggregated for
reporting.
Source: OIG analysis of publicly reported SMCCF transaction data.
6 On April 14, 2021, we issued a memorandum documenting inaccuracies we identified in the Board’s publicly reported
transaction disclosure data for the MSLP. This memorandum can be found at https://oig.federalreserve.gov/reports/board-main-
street-lending-program-april2021.htm.
7 A CUSIP number is a unique identification number assigned to all stocks and registered bonds in the United States and Canada.
These numbers are used to help facilitate trades and settlements by providing a constant identifier to help distinguish the
securities within a trade. Each trade and the corresponding CUSIP number are recorded for the purpose of tracking actions and
activities.
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Mark E. Van Der Weide July 14, 2021
We noted that two main types of transactions raised issues:
• B onds that appeared to be partially redeemed within the reporting period 8 —For each set of
related transactions, one transaction recorded the bond’s par value and amortized cost while the
other simply noted that the bond had been redeemed. 9 These transactions were determined not
to be duplicates; however, additional clarity is needed to explain why CUSIPs appear twice within
the report when a bond is partially redeemed.
• B onds that matured within the reporting period—For each set of duplicates, all reported
information was identical for each transaction with no values recorded.
Full details on the identified transactions are available in the attachment to this memorandum.
After notifying FRB NY officials of these transactions, they initiated a review to determine the validity and
the root cause of the issues we identified. FRB NY officials informed us that 9 of the 12 sets of
transactions at issue were related to partial redemptions. When a bond is partially redeemed within a
reporting period, there are two entries for the same bond within the transaction disclosure report: one
entry to document the bond position still held and one entry to document the partial redemption. In
addition, FRB NY officials informed us that the report was meant to be interpreted as having two distinct
sections to differentiate between bond positions and corporate actions; however, we believe this
distinction is unclear because there are no report headers or table notes to distinguish these report
sections. Clarifying the publicly reported transaction data to account for partial bond redemptions more
clearly would improve the transparency of the publicly reported SMCCF data.
Further, FRB NY officials confirmed that the three duplicates from the April report resulted from an
internal error during report creation. Specifically, these officials explained that the same bonds were
often bought on different dates, which led to the raw data containing multiple line items for the same
bond that would be aggregated for public reporting. FRB NY uses a manual review process to ensure that
maturity, call, and exchange transactions are aggregated and reported as accurately as possible; however,
this process did not catch these three duplicates. To address this issue, FRB NY has implemented
additional manual checks to its process to ensure that these types of errors are caught. 10 While these
duplicates did not result in any inaccuracies in the values reported for par value or amortized cost,
correcting the identified duplicates in publicly reported transaction disclosure data would improve the
clarity and transparency of the publicly reported SMCCF data.
Ensuring the clarity and transparency of publicly reported SMCCF data will provide the Board with greater
assurance that it is meeting the needs of the public and Congress. We are not issuing formal
recommendations in this memorandum. As part of our ongoing evaluation, we intend to further evaluate
the controls in place for the systems and processes involved in the reporting of SMCCF data.
8 FRB NY officials confirmed that these transactions represented bonds that were partially redeemed within the reporting period.
9 Transactions noting that a bond had been redeemed did not include par value or amortized cost information.
10 We verified that the May 10, 2021, report did not contain any duplicated transactions that should have been aggregated for
reporting. The report did contain one transaction that was reported twice because of a partial redemption.
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Mark E. Van Der Weide July 14, 2021
Actions Taken by the Board and FRB NY
After informing Board and FRB NY officials of these issues, they took immediate steps to strengthen
internal review processes to ensure that these transactions are appropriately recorded in the SMCCF
public disclosure data. Specifically, Board and FRB NY officials noted that beginning with the July 2021
report, the SMCCF publicly reported transaction disclosure data will contain a separate tab that more
clearly presents information regarding redemptions (including partial redemptions), maturities, and
exchanges. In addition, Board officials noted that they plan to disclose the transactions from the
April 2021 transaction disclosure report that were reported in duplicate to ensure that no confusion
results from the errors.
Closing
This memorandum includes two items for management’s consideration related to ensuring the clarity and
transparency of the Board’s publicly reported transaction disclosure data. We are reporting on these
issues prior to the completion of our evaluation so that you can take any additional corrective actions on
the Board’s public reporting under the CARES Act that may be needed. A formal response to this
memorandum is not required. Our associated evaluation report may include recommendations related to
the issues described in this memorandum.
We appreciate the cooperation we received from Board and FRB NY officials during this review. If you
have any questions concerning the matters discussed in this memorandum, please contact Paul Vaclavik,
OIG manager for information technology, or me.
Attachment
cc: Patrick J. McClanahan
Sharon Mowry
Matthew J. Eichner
Andreas Lehnert
Lawrence Mize
Timothy Kirby
Steve Bowne
Sarah Podrygula
Helen E. Mucciolo
Michael A. Held
Angela Sun
Alex Leonard
Andrew Danzig
Keith Pulsifer
Peter Seigel
Clive Blackwood
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Mark E. Van Der Weide July 14, 2021
Attachment
Additional Details
Table 2 details the transactions at issue that were identified within the publicly reported SMCCF
transaction disclosures.
Ta ble 2. Transactions at Issue in the Publicly Reported Transaction Disclosures for the SMCCF
Month of
r eport Issuer CUSIP number Coupon Maturity date Relevant issue
January Becton 075887BT5 2.894 06/06/2022 Bond partially
Dickinson and redeemed
Co
January Republic 760759AM2 4.750 05/15/2023 Bond partially
Services Inc redeemed
January WEC Energy 976657AL0 3.550 06/15/2025 Bond partially
Group Inc redeemed
February CenterPoint 15189TAU1 3.850 02/01/2024 Bond partially
Energy Inc redeemed
February Continental 212015AH4 5.000 09/15/2022 Bond partially
Resources redeemed
Inc/OK
March Equitable 054561AC9 3.900 04/20/2023 Bond partially
Holdings Inc redeemed
April Bristol-Myers 110122CZ9 3.250 02/20/2023 Bond partially
Squibb Co redeemed
April Cigna Corp 125523AF7 3.750 07/15/2023 Bond partially
redeemed
April Ford Motor 345397XW8 3.336 03/18/2021 Internal reporting
Credit Co LLC error
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Mark E. Van Der Weide July 14, 2021
Month of
r eport Issuer CUSIP number Coupon Maturity date Relevant issue
April Interpublic 460690BL3 4.200 04/15/2024 Bond partially
Group of Cos redeemed
Inc/The
April Nationwide 638612AK7 5.375 3/25/2021 Internal reporting
Financial error
Services Inc
April Stryker Corp 863667AM3 2.625 3/15/2021 Internal reporting
error
Source: OIG analysis of publicly reported SMCCF transaction data.
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