The Federal Reserve Board has created the Commercial Paper Funding Facility (CPFF), which is a facility that will complement the Fed's existing credit facilities to help provide liquidity to term funding markets.

According to a release from the Fed, the SPV will purchase directly from eligible issuers three-month U.S. dollar-denominated CP at a spread over the three-month overnight index swap (OIS) rate. It will also consult with market players about appropriate spreads that are consistent with the facility serving as a funding backstop under more normal market conditions (for instance, 100 basis points).

The Fed said that commercial paper (including ABCP) bought by the SPV must be rated at least 'A1'/'P1'/'F1' by a major NRSRO and not rated below 'A1'/'P1'/'F1' by any major NRSRO. The SPV will only buy commercial paper that is issued by U.S. issuers including U.S. issuers with a foreign parent.

Commercial paper that is not ABCP must be secured to the satisfaction of the Fed. The Fed said that the commercial paper may be secured in one of the following ways: the issuer pays the SPV an upfront fee based on the commercial paper initially sold to the SPV and a further fee based on subsequent commercial paper sales above that amount; or the issuer obtains an indorsement or guarantee of the issuer’s obligations on the commercial paper sold to the SPV that is satisfactory to the Federal; or the issuer provides collateral arrangements that are satisfactory to the Fed; or the issuer otherwise provides security satisfactory to the Federal Reserve.

The release said  that the Federal Reserve will consult with market participants about other methods for issuers of non-ABCP commercial paper to provide satisfactory security to the Federal Reserve.

In terms of the limits per issuer, the Fed said that the maximum amount of commercial paper a single issuer could sell to the SPV will be the average amount of commercial paper the issuer had outstanding in the month of August 2008, which is less any amount of the issuer’s outstanding commercial paper held by investors other than the SPV.

In terms of the termination date, the SPV will cease buying CP on April 30, 2009, unless the Board agrees to extend the facility. The Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.

In a related development, Federal Reserve Chairman Ben Bernanke at today's National Association for Business Economics 50th annual meeting, said,  "Considerable experience in both industrialized and emerging economies has shown that severe financial instability, together with the associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked."

He added, "For this reason, the Federal Reserve, the Treasury, and other agencies are committed to restoring market stability and are working assiduously to ensure that the financial system is able to perform its critical economic functions. Recent actions by the Congress have given the Treasury new tools and resources to address the stressed conditions of our financial markets and institutions."

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