Fed to buy commercial paper in effort to boost liquidity

Tue, Oct 7 2008, 13:20 GMT
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WASHINGTON (Thomson Financial) - The Federal Reserve will now start buying three-month unsecured and asset-backed commercial paper in an effort to provide more liquidity to term funding markets, the Fed announced this morning.

The Fed said it's new Commercial Paper Funding Facility (CPFF) would "provide a liquidity backstop" to issuers of commercial paper, which is short-term debt issued by a corporation.

The Fed said it would buy commercial paper from "eligible issuers" through a special purpose vehicle (SPV) that it would fund. The Fed will be secured by the assets of the SPV when asset-backed commercial paper is bought. For commercial paper that is not backed by assets, the issuers must pay fees and offer other forms of security that is "acceptable to the Federal Reserve in consultation with market participants."

The Fed said the new facility is needed because the commercial paper market has been under "considerable strain" in recent weeks, and said the Treasury Department believes the program will help "prevent substantial disruptions to the financial markets and the economy."

"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," the Fed said.

"As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day."

The Fed said the new facility would eliminate "much of the risk" that eligible issuers will not be able to repay investors, which should allow investors to "once again engage in term lending in the commercial paper market."

The Fed said the new program will end on April 30, 2009, but could be extended.

pete.kasperowicz@thomsonreuters.com

pik/wash

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