The commercial paper market, which consists of short-term, promissory notes used to supply credit for businesses and municipalities, has been under strain as investors have become reluctant to purchase commercial paper. As a result, interest rates on longer-term commercial paper, with maturities of longer than a week, have surged to levels not seen since the financial crisis of 2008.
Firms have reportedly been unable to issue commercial paper with a term of longer than a week, according to The Fed, which increases their rollover risk and reduces the ability of the commercial paper market to support their operations.
The Secretary of the Treasury and the Board of Governors of the Federal Reserve System supported the New York Fed in establishing the CPFF, to enhance liquidity in the commercial paper market by providing a liquidity backstop to US issuers of commercial paper through a special purpose vehicle (SPV). The SPV will begin making purchases on 14 April, 2020.
The SPV will purchase eligible three-month unsecured commercial paper and asset-backed commercial paper (ABCP) from eligible issuers using financing provided by the Federal Reserve Bank of New York (New York Fed).
The financing provided by the New York Fed to the SPV will be with full recourse to the SPV and secured by all the assets of the SPV. The SPV will hold the commercial paper until maturity and will use the proceeds from maturing commercial paper and other assets of the SPV to repay its loan from the New York Fed.
The Secretary of the Treasury approved the establishment of the CPFF, and the Department of the Treasury, using the Exchange Stabilization Fund, will make a US$10 billion equity investment in the SPV.
©The DESK 2020
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