Commercial Paper Funding Facility (CPFF)

Corporations sell commercial paper (CP) for short-term funding, to pay creditors and employees, and other immediate expenses. To avoid having to register the security with the Securities and Exchange Commission, which lowers the cost and quickens its issuance, the commercial paper must have a maturity of 270 days or less.

Because of its short maturity, many corporations sell commercial paper to retire maturing paper, but during the Credit Crisis of September, 2008, corporations couldn't sell commercial paper, especially for maturities greater than a day, because of the credit risk that was permeating both corporations and financial institutions alike from the holding of subprime mortgages or assets based on them, causing investors to shun the commercial paper market. Without short-term funding, corporations would have to tap credit lines or restrict spending, which, in turn, could cause a recession or depression. Short-term interest rates had also increased significantly.

On October 7, 2008, the Federal Reserve (Fed) announced it will create a special purpose vehicle (SPV), the Commercial Paper Funding Facility, to buy commercial paper to stimulate the market and to provide immediate liquidity to the market, and to bring yields down. However, it will remain as a buyer of last resort, charging a higher interest rate than the market rate to encourage previous market players to begin participating.

The CPFF will be structured as a credit facility to a special purpose vehicle (SPV) authorized under section 13(3) of the Federal Reserve Act. The SPV will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. The Commercial Paper Funding Facility was created as a separate legal entity to buy assets that can potentially lose money, which the Fed, by law, is prohibited from doing.

The Treasury will deposit money to fund the facility, and the Fed will lend to the new facility at the Fed's target rate for overnight loans between banks.

The SPV will purchase directly from eligible issuers 3-month U.S. dollar-denominated unsecured and asset-backed commercial paper (ABCP) at a spread over the 3-month overnight index swap (OIS) rate. If the commercial paper is not backed by assets, then the issuer will have to pay an upfront fee or provide other collateral as security. The commercial paper must be rated at least A1/P1/ F1. The amount of CP purchased will be capped for any one issuer to that which the issuer had outstanding in August, 2008 minus any currently held by investors. As investors buy more, the CPFF will buy less.

The CPFF will terminate on April 30, 2009, unless the Board of Governors of the Federal Reserve extends it.