CPFF - Comercial Paper Funding Facility

In the recent assignment to calculate the total cost of the financial crisis, I was assigned CPFF.

The Federal Reserve created the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF was intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households. Under the CPFF, the Federal Reserve Bank of New York financed the purchase of highly rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers. The CPFF began operations on October 27, 2008, and was closed on February 1, 2010.

The CPFF was created because the commercial paper market has been under considerable strain in the early weeks of the crisis as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, an increasingly high percentage of outstanding commercial paper needed to be refinanced each day, interest rates on longer-term commercial paper have increased significantly, and the volume of outstanding commercial paper has declined. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have reduced their ability to meet the credit needs of businesses and households.

The CPFF provided a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase eligible three-month unsecured and asset-backed commercial paper from eligible issuers using financing provided by the Federal Reserve Bank of New York (New York Fed). The SPV will hold the commercial paper until maturity and will use the proceeds from maturing commercial paper and other assets of the SPV to repay its loan from the New York Fed.

Authorized: The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between January 1 and August 31, 20081. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit.

Peak Spending: $349.94 Billion

Current: Zero, facility is closed

Below is the chart of the CPFF spending over time.

I would argue that the creation of the CPFF was a success during the crisis to help contain the crisis to the holders of the toxic assets rather than a extended credit freeze in the commercial paper market. Many non-financial companies fund their operations through the constant access of the commercial paper market and stabalizing this market was a clear success of the Federal Reserve.

Source: Federal Reserve website