What is commercial paper funding facility?

Commercial paper funding facility (CPFF) is a program established by the Federal Reserve to provide liquidity support to eligible issuers of commercial paper. During times of financial stress, it can become difficult for corporations to access short-term funding. The CPFF aims to alleviate this issue by providing a backstop for qualified issuers to meet their short-term financing needs.

What is commercial paper?

Commercial paper is an unsecured promissory note issued by corporations to raise short-term funds. It typically has a maturity of up to 270 days and is considered a low-risk investment instrument.

How does the CPFF work?

Under the CPFF, the Federal Reserve purchases commercial paper directly from eligible issuers through primary dealers. This helps to improve liquidity in the commercial paper market, making it easier for corporations to obtain short-term financing.

What are the eligibility criteria for issuers seeking CPFF support?

To qualify for CPFF support, issuers must be U.S. companies that meet certain credit rating requirements and have a significant presence in the United States. Eligibility is determined by analyzing various factors such as creditworthiness, size, and importance to the overall markets.

How does the Federal Reserve determine the pricing for commercial paper under the CPFF?

The pricing of commercial paper under the CPFF is based on the requirement that the issuer pays a discount rate relative to the market rate prevailing at the time of issuance. This rate is established by the Federal Reserve in consultation with market participants.

What is the purpose of the CPFF?

The primary purpose of the CPFF is to provide a stable source of funding for eligible issuers when the commercial paper market experiences significant stress. By ensuring the availability of short-term financing, the program contributes to the overall stability of the financial system.

How does the CPFF differ from other Federal Reserve programs?

Unlike some other Federal Reserve liquidity programs that primarily focus on banks, the CPFF directly supports eligible corporations by purchasing their commercial paper. This targeted approach helps address the specific liquidity needs of non-bank entities.

When was the CPFF established?

The CPFF was established in response to the global financial crisis in 2008. It was reintroduced in March 2020 amidst the economic uncertainty caused by the COVID-19 pandemic.

What is the role of primary dealers in the CPFF?

Primary dealers act as intermediaries between the Federal Reserve and eligible issuers. They facilitate the sale of commercial paper to the Federal Reserve on behalf of issuers, ensuring smooth operations of the CPFF.

Is the CPFF a permanent program?

No, the CPFF is designed as a temporary facility that operates during times of financial stress. It is intended to provide support when market functioning is impaired and is not meant to be a permanent source of funding.

What happens to the commercial paper purchased by the Federal Reserve?

The commercial paper purchased by the Federal Reserve through the CPFF becomes an asset on the Federal Reserve’s balance sheet. The intent is to hold the commercial paper until maturity, providing liquidity support to issuers for the specified period.

How does the CPFF benefit the economy?

By ensuring the availability of short-term financing for eligible issuers, the CPFF helps maintain the smooth functioning of the commercial paper market. This, in turn, supports the operations of corporations, fostering economic stability and growth.

Are there any risks associated with the CPFF?

While the CPFF aims to provide support to stabilizing the market, there are inherent risks associated with any liquidity program. The Federal Reserve carefully manages these risks to minimize any potential adverse consequences.

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