Primary Dealer Credit Facility and Commercial Paper Funding Facility – COVID-19 Response

This week, the New York Fed announced the establishment of two facilities to support the functioning of the primary dealer market and the commercial paper market in light of the disruptions caused by COVID-19.

PDCF

On March 17, the New York Fed announced that it is establishing a Primary Dealer Credit Facility, or PDCF, to enable primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households.

The PDCF will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020. It is expected to be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. Eligibility will hinge on ability of the clearing bank to price the collateral. See the short form term sheet, which was released by the NY Fed with the announcement, for additional details. The interest rate charged will be the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

On March 19, the New York Fed issued a release including Frequently Asked Questions for the new Primary Dealer Credit Facility announced March 17, 2020, and available beginning Friday, March 20, 2020. We understand that rates and collateral schedules are expected to be released later today, March 19.

The FAQs provide useful information about the facility terms and identifies the eligible primary dealers. Among other things, it highlights differences from the predecessor overnight facility that was implemented during the financial crisis in 2008. Perhaps the most material difference is that this PDCF provides for 90-day financing rather than overnight. The facility is with full recourse to the dealers who use it.

The FAQs do not provide any additional detail on types of collateral that are eligible, but refers viewers to the term sheet, attached again here for your reference. The term sheet does provide for eligibility of a wide range of securities, is limited to AAA rated CMBS, CLOs and CDOs, and investment grade for other MBS and other eligible ABS.

More detailed terms and conditions and an operational calendar will be subsequently released. Further updates on the PDCF will be posted here as they are available.

The PDCF is established under Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

CPFF

On March 16, the Federal Reserve Board announced that it will establish a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses. The CPFF will provide a liquidity backstop to US issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies. Eligible issuers are US issuers of commercial paper, including US issuers with a foreign parent.

On March 25, the Fed released a set of Frequently Asked Questions to address programmatic inquiries about the facility.

By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, the CPFF is expected to encourage investors to participate in the ABCP market and the unsecured commercial paper market. 

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 March 16, 2019 and March 16, 2020. The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility.

The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury's Exchange Stabilization Fund (ESF). The Federal Reserve will then provide financing to the SPV under the CPFF. Its loans will be secured by all of the assets of the SPV.

A brief description of the program is available here. The Fed has promised that more detailed program terms and conditions and an operational calendar will be subsequently published. 

The CPFF program is established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.