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On March 17, the Federal Reserve announced that it would implement a Commercial Paper Funding Facility (CPFF) to support the flow of credit to businesses and households during the coronavirus pandemic.
The Fed used its authority under section 13(3) of the Federal Reserve Act to implement the new program (see here). Section 13(3) allows the Fed to lend to nonfinancial organizations when the Federal Reserve Board determines there are “unusual and exigent circumstances.” This is the Fed’s first use of that authority since the Global Financial Crisis of 2007-09.
The Fed last employed a CPFF in October 2008, when in the midst of the Global Financial Crisis outstanding CP had dropped by roughly $300 billion. At that time, the market experienced severe shortening of maturities and increased rates making it difficult for issuers to place new paper.
The language in the terms of the new CPFF closely follows the language in the earlier CPFF. As in 2008, the Federal Reserve Bank of New York (FRBNY) will make loans to a special purpose vehicle that will purchase highly-rated US dollar-denominated, three-month unsecured and asset-backed commercial paper from eligible US issuers. As before, eligible issuers are U.S. issuers of commercial paper, including U.S. issuers with a foreign parent company. The program will purchase commercial paper until March 17, 2021. The Fed could extend the facility past that date. The 2020 CPFF Terms and Conditions can be found here and the 2008 CPFF Terms and Conditions and FAQs can be found here and here, respectively.
The new program is supported by $10 billion in credit protection provided by the U.S. Treasury Department, using the Exchange Stabilization Fund (ESF). The earlier CPFF was also supported by $50 billion from the Treasury.
The 2008 CPFF’s role in helping to revive the term-lending market has been debated. However, in its first weeks it was highly utilized and purchased the overwhelming majority of new term CP. At its highest level in January 2009, the CPFF held $350 billion of CP, 20% of all outstanding CP. Evidence suggests that the 2008 CPFF provided market participants a rollover option for maturing paper and helped restore lending by CPFF participants to their non-financial corporate borrowers.
Click here to read a YPFS case study that discusses the 2008 CPFF in detail and provides access to the key documents utilized with that facility.