Commercial Paper Funding Facility - Explained
What is a Commercial Paper Funding Facility?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is a Commercial Paper Funding Facility?
The Federal Reserve Bank of New York is a parenting company of the Commercial Paper Funding Facility (CPFF). The CPFF was founded on 27th October 2008, saddled with the responsibility of providing solutions to the credit problems challenging financial channels in the commercial paper market.
How Does a Commercial Paper Funding Facility Work?
The CPFF began operation in October 2008 but stopped operation in February 2010 following the Federal Reserve Bank of New York directives. They are primarily responsible for providing liquidity to Most of the U.S issuers of commercial papers registered with the CPFF are funded or provided a liquidity backstop by the Commercial Paper Funding Facility (CPFF). A Special Purpose Vehicle was used to fund this registered members. The SPV primarily refers to a bankruptcy-remote entity. This means a part of a corporate body whose tendency to being bankrupt does not affect the whole corporate body. This is a strategy deployed to secure assets but recorded off the balance sheet. The SPV is funded by the Federal Reserve Bank of New York. To use the CPFF's SPV, registered members pay a sum of money two business days earlier for registration. Then, the New York Fed decides the maximum value of commercial paper the issuer can sell to the SPV.
Goal and Purpose of the Commercial Paper Funding Facility
The CPFF was created to be the panacea to the problem faced by the commercial market in that investors and mutual funds holder do not buy commercial paper. This is basically to boost the value of the commercial paper market. The CPFF was created solely to provide U.S. issuers of commercial paper with this liquidity backstop. Hence, this will improve the liquidity in short-term funding markets and businesses, individuals and others will be able to access loans or other forms of credits. The CPFF was an avenue through which the Federal Reserve Bank of New York financed the unsecured and asset-backed commercial paper through qualified issuers and primary dealers. The special-purpose vehicle (SPV) purchases the unsecured and asset-backed commercial paper at a reduced price, but pays the Federal Reserve Bank of New York when the commercial paper matures. The CPFF grants accredited members the right to disburse loans for individuals or businesses.