Forex Investment and Currency Trading

The Federal Reserve announced that it is creating a facility to fund short-term commercial paper. The Commercial Paper Funding Facility (CPFF) will purchase short term (less than three months) commercial paper directly from the issuers; the facility will purchase both asset-backed and non-asset backed commercial paper. The program will operate with Treasury backing, who will help to fund it via a deposit at the New York Fed. Through the creation of the facility the Fed hopes to unclog the CP market, bringing rates down and facilitating issuance. This is viewed by that market as a positive step because it should ensure that outstanding CP programs are able to roll despite the current distress.

• The Federal Reserve announced another new facility, this one to provide funding for commercial paper — both asset-backed and unsecured. The Commercial Paper Funding Facility (CPFF) will fund a special purpose vehicle (SPV) that will purchase commercial paper and hold it to maturity.
• Because the CPFF will purchase unsecured commercial paper, it operates at the edge of the Federal Reserve’s statuatory authority under the Federal Reserve Act. Section 13(3) of that act allows the Fed to discount any securities “indorsed or otherwise secured” to the satisfaction of the Fed, and that the corporation is “unable to secure adequate credit from other banks. To be eligible for the facility, CP must be have maturity of more than 3 months maturity, and be high quality, defined as a rating of at least A1/P1.
• Operational details of the facility are not entirely clear, but the Fed does provide some initial points: 1) the spread at which CP will be purchased will be a rate high enough to be used as a backstop rather than a replacement for the market (the release cites 100bps over OIS as an “example”); 2) CP must be guaranteed or secured in some way; for non asset-backed paper, the issuer must pay a fee; obtain a third-party guarantee; provide collateral; or provide some other form of security; 3) the total amount of CP sold by an issuer to the facility cannot exceed the amount outstanding as of August 2008, less the amount held by others. This means that the facility will ensure that existing CP programs continue to roll, but it will not allow for the initiation of new programs. From the materials provided by the Fed, it appears that both financial and non-financial CP will be eligible. The facility would purchase through April 30, 2009, and like other Fed facilities, could be extended past that date.
• On balance, market views this as quite a positive development. The ability to roll existing paper removes an area that could have led to substantial further deterioration that could have quickly fed through into the real economy. Note that Bernanke speaks at 1:15 and could well provide some more discussion of this program