The Secondary Market Corporate Credit Facility (SMCCF) was a special purpose vehicle (SPV) launched by the Federal Reserve on March 23, 2020, to support the corporate bond market in the face of the COVID-19 crisis. The SMCCF purchased U.S. investment-grade corporate bonds and bond ETFs in the secondary market. The idea was that banks would be more likely to lend to corporations if they knew there was a strong secondary market to which they could sell that debt. The program was expanded to include the purchase of more bonds and bonds of lower credit quality on April 9, 2020.

The SMCCF started purchasing bond ETFs on May 12, 2020, and said it would begin purchasing individual bonds to create a "broad, diversified market index" of individual U.S. corporate bonds starting on June 16, 2020.

A related initiative by the Fed was the Primary Market Corporate Credit Facility (PMCCF). Between the two initiatives, the Fed purchased $750 billion in bonds.

On Nov. 19, 2020, Treasury Secretary Steven Mnuchin said he would not reauthorize extending the SMCCF past Dec. 31, 2020. The SMCCF stopped buying bonds or ETFs after Dec. 31, 2020.

Key Takeaways

  • The Fed was trying to ensure banks continued to lend to corporations.
  • The Secondary Market Corporate Credit Facility (SMCCF) bought corporate bonds and bond ETFs.
  • It encouraged lending by ensuring demand for corporate bonds in secondary markets.
  • The program started buying bond ETFs on May 12, 2020, and started buying individual bonds on June 16, 2020.
  • The SMCCF stopped buying bonds or ETFs after Dec. 31, 2020.

Details on the SMCFF

The Secondary Market Corporate Credit Facility (SMCCF) was an SPV that purchased bonds in the secondary market. The U.S. Department of the Treasury provided an initial investment in the SMCCF of $25 billion. The bonds the SMCCF held were the collateral for the loans the Fed gave it.

The Federal Reserve Bank of New York (FRBNY) managed the SMCCF and lent to it on a recourse basis. Corporate bonds that were eligible for purchase by the SMCCF must have been issued by U.S. businesses that had material operations in the U.S. and were not expected to receive direct federal financial assistance. The SPV also purchased shares of U.S.-listed ETFs whose holdings were primarily investment-grade U.S. corporate bonds.

Eligible bonds also were required to have a rating of at least BBB- or Baa3 as of March 22, 2020, from a major nationally recognized statistical rating organization (NRSRO) or by at least two major NRSROs if rated by more than one. If the bonds had their credit rating downgraded after March 22, then they had to be rated BB-/Ba3 by two or more NRSROs when the facility bought them. All individual bonds purchased were required to have a remaining maturity of five years or less.

The SMCCF was also excluded from lending to issuers that received specific support from the CARES Act or any subsequent federal laws. Companies also had to satisfy conflict of interest requirements under section 4019 of the CARES Act. They also could not be a depository institution as defined under the Dodd-Frank Act.

The SMCCF didn't hold more than 10% of the bonds issued by a given corporation or 20% of an ETF's assets.

The SMCCF bought corporate bonds at fair market value. With ETFs, the SPV avoided purchasing shares of those whose market prices "materially exceed[ed]" their net asset values (NAVs).

The SMCCF stopped buying bonds or ETFs after Dec. 31, 2020. The New York Fed will continue to fund this SPV until its assets mature or are sold.