The Commercial Paper Funding Facility (CPFF) is a special purpose vehicle (SPV) created by the Federal Reserve to purchase commercial paper, in order to ensure commercial paper markets stay 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 coronavirus outbreak, "the commercial paper market has been under considerable strain," the Fed notes. The goal of the CPFF is to eliminate much of the risk that eligible issuers will be unable to repay investors.

Previously, a CPFF was created by the Fed on October 27, 2008 as part of its initiatives to combat the financial crisis. It was used to fight the credit crunch caused by the 2008 financial crisis, just like today's CPFF is being used to fight the credit crunch caused by the COVID-19 pandemic. It was closed down in 2010, after making purchases worth $738 billion.

Key Takeaways

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

Details on the CPFF

The Commercial Paper Funding Facility (CPFF) is a special purpose vehicle (SPV) that will purchase both unsecured and asset-backed commercial paper. The U.S. Department of the Treasury will use 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 will be secured by the assets that the SPV holds.

The Federal Reserve Bank of New York (FRBNY) is the entity within the Federal Reserve System that will manage the CPFF and lend to it. To be eligible for purchase by the CPFF, commercial paper must be 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 will limit 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 will produce a yield that equals the current 3-month overnight index swap (OIS) rate plus 200 basis points.

Issuers must apply in advance to have their commercial paper eligible for purchase by the CPFF, and must pay a facility fee of 10 basis points on the maximum amount of its paper that this SPV may own. The CPFF will stop buying commercial paper after March 17, 2021, unless the Fed extends its operations. The New York Fed will continue to fund the CPFF until its assets mature.