The Commercial Paper Funding Facility (CPFF) was a special purpose vehicle (SPV) created by the Federal Reserve to purchase commercial paper to ensure commercial paper markets remained liquid. The Fed stated in its March 17, 2020, press release: "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."

As a result of uncertainties created by the COVID-19 outbreak, "the commercial paper market has been under considerable strain," the Fed noted. The goal of the CPFF was to eliminate much of the risk that eligible issuers will be unable to repay investors.

Previously, a CPFF was created by the Fed on Oct. 27, 2008, as part of its initiatives to fight the credit crunch caused by the 2008 financial crisis. It was closed down in 2010, after making purchases worth $738 billion. Today's CPFF is also being used to fight the credit crunch caused by the coronavirus pandemic. The program expired on March 31, 2021.

Key Takeaways

  • Commercial paper is short-term, unsecured debt used by businesses for everyday expenses.
  • The commercial paper market was under stress because of the COVID-19 crisis.
  • The Fed launched a program to provide liquidity to this market.
  • The program was a revival of one taken during the 2008 financial crisis.
  • The program expired on March 31, 2021.

Details on the Commercial Paper Funding Facility (CPFF)

The Commercial Paper Funding Facility (CPFF) was an SPV that purchased both unsecured and asset-backed commercial paper. The U.S. Department of the Treasury has used its Exchange Stabilization Fund (ESF) to provide the Fed with $10 billion of credit protection for the CPFF. Loans extended by the Fed to the CPFF were secured by the assets that the SPV holds.

The Federal Reserve Bank of New York (FRBNY) was the entity within the Federal Reserve System that managed the CPFF and lent to it. To be eligible for purchase by the CPFF, commercial paper must have been issued in the U.S. (including by U.S.-based issuers with a foreign parent company), denominated in U.S. dollars, and rated A-1, F-1, or P-1 by a major nationally recognized statistical rating organization (NRSRO) or by at least two major NRSROs if rated by more than one.

The CPFF limited its holdings from a given issuer to the maximum amount of commercial paper denominated in U.S. dollars that was outstanding from that issuer on any day between March 16, 2019, and March 16, 2020. The price offered by the CPFF when making purchases produced a yield that equals the current three-month overnight index swap (OIS) rate plus 200 basis points.

Issuers must have applied in advance to have their commercial paper eligible for purchase by the CPFF, and they must have paid a facility fee of 10 basis points on the maximum amount of its paper that this SPV may own. The CPFF stopped buying commercial paper after March 31, 2021. The New York Fed will continue to fund the CPFF until its assets mature.