The vehicle will be secured by the collateral underpinning ABCP, and, in the case of non-asset backed paper, by the retention of up-front fees paid by the issuers or by “other forms of security” acceptable to the US central bank.
Only commercial paper rated at least A1/P1/F1 by a major ratings agency will be eligible for purchase, however, and the volume of paper each issuer can sell under the CPFF will be limited to the average amount of commercial paper the issuer had outstanding as of August 2008.
The Fed intends to cease purchasing commercial paper through the SPV on April 30, 2009, although it has reserved the right to extend the facility if deemed necessary. Beyond that date, the Fed will continue to fund the SPV until the vehicle’s underlying assets mature.
The commercial paper market has virtually seized up in the last month as investors including money market funds have steered clear of commercial paper, especially that of longer-dated maturities, pushing up interest rates and placing further pressure on the already stressed balance sheets of financial institutions.
Following the passage of the $700 billion Emergency Economic Stabilisation Act in the House of Representatives on October 3, congressional leaders appear to have grown more concerned about the knock-on effects for the wider economy from banks’ inability to raise funds in money markets – especially in the form of evaporating credit for consumers and small business.
Nonetheless, Spencer Bachus, ranking Republican member of the House Committee on Financial Services commented that: “While I’m pleased that some of my proposals were included in the [CPFF] legislation, I will continue to pursue others like covered bonds and direct commercial paper that were not.”
Bachus and his Republican colleagues have advocated the creation of a National Repository and Lending Institution, which would allow businesses to access short-term loans with maturities of up to one year directly from the federal government. Significantly, this plan would see “assistance flowing directly to Main Street – which played no role in the current financial crisis – rather than rewarding Wall Street, which made the mess,” according to a statement from the Republican congressional leadership.
See also: Fed to treble lending
Bailouts fail to lift markets
The Commercial Paper Funding Facility (CPFF) will permit the Fed to buy three-month unsecured and asset-backed commercial paper (ABCP) directly from approved US issuers through a special purpose vehicle (SPV) at a spread over the three-month overnight index swap rate. The spread will be determined through consultation with market participants to establish an appropriate funding rate that better reflects the cost of providing a funding backstop under more normal market conditions, rather than at today’s stressed rates.