Fed Creates New Facility to Purchase Unsecured Commercial Paper

Using its extraordinary powers during times of turmoil, the Fed announced the creation of the Commercial Paper Funding Facility (CPFF), allowing the central bank to purchase three-month unsecured commercial paper.

"The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers," the Fed said in a press release.

"The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants."

The Fed said it is working with the Treasury Department, which believes the creation of the facility will help prevent substantial disruptions to the financial system and the economy.

"By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market," the release said.

By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2008