The Secondary Market Corporate Credit Facility (SMCCF) is 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 coronavirus crisis. The SMCCF will purchase U.S. investment grade corporate bonds and bond ETFs in the secondary market. The idea is that banks will be more likely to lend to corporations if they know there is a strong secondary market to sell that debt to. 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 will 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 is the Primary Market Corporate Credit Facility (PMCCF). Between the two initiatives the Fed will purchase $750 billion in bonds.

Key Takeaways

  • The Fed is trying to ensure banks continue to lend to corporations.
  • The Secondary Market Corporate Credit Facility (SMCCF) buys corporate bonds and Bond ETFs.
  • It encourages lending by ensuring that there will be demand in secondary markets for corporate bonds.
  • The program started buying bond ETF's on May 12, 2020, and started buying individual bonds on June 16, 2020.

Details on the SMCFF

The Secondary Market Corporate Credit Facility (SMCCF) is a special purpose vehicle (SPV) that will purchase bonds in the secondary market. The U.S. Department of the Treasury will provide an initial investment in the SMCCF of $25 billion. The bonds the SMCCF holds will be the collateral for the loans the Fed gives it.

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

Eligible bonds also must have had 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 must be at least rated BB-/Ba3 by two or more NRSROs when the facility buys them. All individual bonds purchased must have a maturity of five years or less.

The SMCCF is also excluded from lending to finds that receive specific support in from the CARES act or any subsequent federal laws. Companies also must satisfy conflict of interest requirements under section 4019 of the CARES Act. They can also not be a depository institution as defined under the Dodd-Frank Act.

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

The SMCCF will buy corporate bonds at fair market value. With ETFs, the SPV will avoid purchasing shares of those whose market prices "materially exceed" their net asset values (NAVs).

The SMCCF will stop buying bonds or ETFs after December 31, 2020, unless the Fed extends its operations. The New York Fed will continue to fund this SPV until its assets mature or are sold.