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Federal Reserve Establishes Commercial Paper Funding Facility to Support Flow of Credit to Households and Businesses

March 17, 2020, Covington Alert

Today, on March 17, 2020, the Federal Reserve provided a backstop of commercial paper ("CP") in the form of a Commercial Paper Funding Facility (“CPFF”) that establishes a special purpose vehicle (“SPV”) to acquire eligible CP directly from eligible issuers.  The CPFF will provide liquidity to CP issuers that may otherwise face issues rolling over their CP in the coming weeks and months as a result of economic disruptions caused by COVID-19.

The Federal Reserve established the new CPFF, which is broadly similar to the CPFF that the Federal Reserve established in the fall of 2008, pursuant to its emergency authority under section 13(3) of the Federal Reserve Act to make a broad-based discount facility available in unusual and exigent circumstances.  Establishment of the new CPFF is the latest in a series of extraordinary actions the Federal Reserve has taken in recent days to mitigate the impact of COVID-19 on the provision of credit to households and businesses.

This alert summarizes the key parameters of the new CPFF, which are set forth in a term sheet that will be followed by more detailed terms and conditions once finalized by the Federal Reserve.

Eligibility Requirements

Eligible issuers under the new CPFF are U.S. issuers of commercial paper, including U.S. issuers with a foreign parent company.  An issuer need not be a commercial bank to qualify.

Eligible CP is limited to U.S. dollar-denominated three-month CP (including asset-backed commercial paper) that is rated at least A-1/P-1/F-1 by a major nationally recognized statistical rating organization ("NRSRO") or, if rated by multiple NRSROs, rated at least A-1/P-1/F-1 by two or more NRSROs.  These conditions are subject to review by the Federal Reserve.

The SPV will also make one-time purchases of CP from any issuer that met the A-1/P-1/F-1 rating criteria as of March 17, 2020, and were rated at least A-2/P-2/F-2 as of the purchase date, up the amount of that issuer’s CP outstanding on March 17, 2020.  This one-time purchase may help issuers roll over CP in the short-term, then transition to longer-term funding, even if their ratings deteriorate by the next maturity date.

The maximum amount of a single issuer’s CP the SPV may own at any time will be the greatest amount of U.S. dollar-denominated CP the issuer had outstanding on any day between March 16, 2019 and March 16, 2020.

Termination Date

The SPV will cease purchasing CP on March 17, 2021, unless the Board of Governors extends the CPFF.

Discount Rate and Facility Fee

Pricing for the new CPFF will be based on the then-current 3-month overnight index swap (“OIS”) rate plus 200 basis points per annum, whether the CP is unsecured or secured.  By comparison, the 2008 CPFF set its discount rate at OIS plus 200 basis points per annum for unsecured CP and OIS plus 300 basis points per annum on asset-backed CP.

At the time of its registration to use the new CPFF, each issuer will be required pay a facility fee equal to 10 basis points of the maximum amount of the issuer’s CP that the SPV may own.

Funding Sources

The SPV will be funded by loans from the Federal Reserve Bank of New York (“FRBNY”), secured by all of the SPV’s assets.  The U.S. Department of the Treasury will use the Exchange Stabilization Fund to provide $10 billion of credit protection to the FRBNY for these purposes.


Covington & Burling LLP’s Financial Services attorneys have deep experience guiding U.S. and non-U.S. financial institutions through the most challenging circumstances, including the 2008-09 financial crisis.  Our team, which includes former senior federal regulators, stands ready to advise financial institutions as they navigate the impact of COVID-19 on the economy and the financial markets.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services practice below.

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