What Is the Commercial Paper Funding Facility (CPFF)?
The Commercial Paper Funding Facility (CPFF) is an institution created by the Federal Reserve Bank of New York on October 27, 2008, as a result of the credit crunch faced by financial intermediaries in the commercial paper market during the height of the financial crisis that gave way to the Great Recession. It was closed down in 2010, after making purchases worth $738 billion.
The CPFF was reinstated by the Fed in the Spring of 2020 in response to the market turmoil that was predicated by the COVID19 pandemic.
- The Commercial Paper Funding Facility (CPFF) was a Federal Reserve-led response to support the commercial paper market as it floundered at the height of the 2008-09 financial crisis.
- Commercial paper refers to short-term, unsecured debt used by businesses for everyday expenses, and is a critical piece of the financial infrastructure.
- The original CPFF was closed in 2010, but brought back in March 2020 in response to the COVID19 pandemic economic crisis.
Understanding the Commercial Paper Funding Facility
The Commercial Paper Funding Facility (CPFF) provided liquidity to U.S. issuers of commercial paper registered with the CPFF. This can also be viewed as providing a liquidity backstop to these registered commercial paper issuers.
This was made possible through a special purpose vehicle (SPV) that is funded by the Federal Reserve Bank of New York. An SPV is a bankruptcy-remote entity, meaning a specific, isolated part of a corporate group whose possible bankruptcy would have as little impact as possible on the greater corporate entity. This corporate strategy is used as a way to isolate or secure assets and is often recorded off the balance sheet.
U.S. issuers of commercial paper were required to register for a fee at least two business days prior to using the CPFF's SPV. At the time of registration, the New York Fed determined the maximum value of commercial paper the issuer can sell to the SPV.
The CPFF first went into operation in October 2008. The Federal Reserve Bank of New York closed the CPFF in February 2010.
Goal and Purpose of the Commercial Paper Funding Facility
The Federal Reserve’s main goal in creating the CPFF was to provide U.S. issuers of commercial paper with this liquidity backstop, to boost the liquidity in short-term funding markets. This, in turn, would enable greater availability and accessibility of credit for businesses and individuals. At the time the CPFF was created, the commercial paper market was experiencing significant strain because investors, including money market mutual funds, were hesitant to purchase commercial paper, especially with longer-dated maturities, given that these investors were already struggling with liquidity pressures. The CPFF intended to improve the liquidity of the commercial paper market.
The CPFF served as a platform through which the Federal Reserve Bank of New York could finance the purchase of highly-rated commercial paper, both unsecured and asset-backed. These purchases would be made from eligible issuers vie eligible primary dealers.
The CPFF allowed financial intermediaries to approve loans for individual clients and businesses. The SPV used by the CPFF purchases and holds three-month unsecured commercial paper and asset-backed commercial paper at a discounted rate until maturity. The Federal Reserve Bank of New York was repaid as the maturing commercial paper assets matured.
The COVI19 CPFF Response
In response to the economic fallout of the COVID19 pandemic, the commercial paper market once again saw turmoil. The new 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.