The Federal Reserve Board announced that it will establish a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses. Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies.
By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies.
The CPFF program is established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
"By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. Specifically, the vehicle would purchase commercial paper that is currently rated A-1/P-1/F1 by a nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, is currently rated at least A-1/P-1/F1 by two or more major NRSROs," said Treasury Secretary Steven T. Mnuchin. "The Federal Reserve Bank of New York (FRBNY) would charge rates and fees to eligible issuers based on collateral arrangements, indorsements, or guarantees that the FRBNY determines to be acceptable. This will support the smooth functioning of the financial markets and Treasury will provide $10 billion of capital to the CPFF from the Exchange Stabilization Fund.”
The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.
The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury's Exchange Stabilization Fund (ESF). The Federal Reserve will then provide financing to the SPV under the CPFF. Its loans will be secured by all of the assets of the SPV.