Fed plans to buy commercial papers

08 October 2008

The U.S. Federal Reserve announced the creation of the Commercial Paper Funding Facility and said it would begin buying the short-term debt many companies use to fund their day-to-day operations.

The U.S. Federal Reserve announced the creation of the Commercial Paper Funding Facility and said it would begin buying the short-term debt many companies use to fund their day-to-day operations. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. 

 

The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. 

 

The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities, the Fed states. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. 

 

Commercial Paper Funding Facility (CPFF) Terms and Conditions

 

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