What Is the Commercial Paper Funding Facility (CPFF)?

The Commercial Paper Funding Facility (CPFF) was a program instituted in October of 2008 to alleviate the strain on money market funds during the Great Recession. The CPFF was designed to increase the liquidity of the commercial paper market by providing funding to issuers. The program specifically provided a backup measure of liquidity for commercial paper issuers via a special purpose vehicle (SPV).

The Fed again opened the CPFF in March of 2020 in response to the steep market selloff and economic uncertainty surrounding the start of the global COVID-19 pandemic.

Key Takeaways

  • The Commercial Paper Funding Facility (CPFF) was a program established by the Federal Reserve to stabilize the commercial paper market during the 2008 financial crisis through the use of SPVs.
  • Commercial paper refers to short-term corporate debt instruments used to fund the day-to-day operations of many businesses and is crucial to the functioning of both businesses and financial markets.
  • The CPFF was re-established in the Spring of 2020 in response to the COVID-19 pandemic's initial economic fallout.
  • The Commercial Paper Funding Facility (CPFF), both the 2008 and 2020 versions, is administered by the Federal Reserve Bank of New York.

Understanding the Commercial Paper Funding Facility (CPFF)

Commercial paper is a critical source of funding for many businesses. It is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.

The commercial paper market played a big role in the financial crisis that began in 2007. As investors began to doubt the financial stability and liquidity of firms such as Lehman Brothers, the commercial paper market froze, and firms were no longer able to access easy and affordable funding. Another effect of the commercial paper market freezing was some money market funds—substantial investors in commercial paper—"breaking the buck." This meant that the affected funds had net asset values under $1, reflecting the diminishing value of their outstanding commercial paper issued by firms of suspect financial standing.

The Commercial Paper Funding Facility was subsequently created by the Federal Reserve Bank of New York on Oct. 7, 2008, as a result of the credit crunch faced by financial intermediaries in the commercial paper market. The Federal Reserve Bank of New York closed the CPFF in February 2010 after it no longer became necessary as the financial sector and the broader economy recovered.

The SPVs created through the CPFF were financed directly by the Federal Reserve Bank of New York and were used to purchase three-month commercial paper, both secured and unsecured. This financing was then to be secured by the assets placed into the SPVs and also by the fees paid by issuers of unsecured paper. The U.S. Treasury department felt that the program was required in order to prevent further substantial disruption of the financial markets.

The CPFF and the COVID-19 Pandemic

In March of 2020, much of the world's global markets and economic apparatus were thrown into disarray as the COVID-19 pandemic emerged and spread throughout the world. This forced governments to impose lockdown orders and many people stayed home out of fear of infection. During this time, the Fed re-established the CPFF facility on a one-year basis through an SPV to help maintain stability in the commercial paper market.

The U.S. Treasury also provided $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury's Exchange Stabilization Fund (ESF). The Federal Reserve then provided financing to the SPV under the CPFF. Its loans were secured by all of the assets of the SPV.