Fed Sets Up Money Market Investor Funding Facility

By: • Tue, Oct 21 2008, 10:13 AM

In accordance with Section 13(3) of the Federal Reserve Act, the U.S. central bank has set up the Money Market Investor Funding Facility (MMIFF), a new facility to purchase U.S. certificates of deposit and commercial paper issued by highly rated financial entities in an effort to continue providing credit to the money market.

"The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs," read a press release form the Fed. "By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments."

The Fed also suggested that additional liquidity provisions would help accommodate the credit needs of businesses and households.

The move follows similar facilities which allow the Fed to acquire commercial paper and asset-backed commercial paper.

Money market funds - in which high-liquidity financial instruments are traded for short-term gains - are used primarily by individuals with moderate-sized accounts. Initiated in 1971, the mutual funds allow for borrowing and lending ranging from several days to just under a year, and are considered to be a safe haven for investors hoping to avoid the volatility of equity and fixed-income markets.

The original announcement for the $50 billion temporary insurance fund was on Sept. 29. The need for insurance became clear to the Treasury when, after writing off debt issued by Lehman Brothers, shares in the Reserve Primary Fund fell to 97 cents, marking the first time in 15 years - and only the second time in history - that a money market share "broke the buck," or fell below its net asset value.