The Federal Reserve Board announced yesterday the creation of a Money Market Investor Funding Facility (MMIFF), a credit facility to support a private sector initiative designed to help provide liquidity to the short-term debt markets. Pursuant to this initiative, U.S. money market mutual funds, which need liquidity to meet redemption needs, will be able to sell certain portfolio securities (as described below) at amortized cost to special purpose vehicles (SPVs) administered by JP Morgan Chase and supported by the MMIFF. The MMIFF will fund purchases of up to $600 billion dollars worth of eligible assets. The Federal Reserve has not yet announced MMIFF’s start date.
It is important to note that the Fed’s program will fund purchases only of highly rated, Rule 2a-7 eligible securities from money market funds. The program is designed to assist funds in meeting redemption requests and other liquidity needs. The program does not involve the purchase of any ineligible securities from funds. It is possible, however, that money market funds may be able to sell impaired securities to the Department of Treasury through the Troubled Assets Relief Program (TARP). However, there are some outstanding questions with respect to open-end funds’ eligibility for TARP. Details regarding TARP eligibility are still being discussed.
There will be five SPVs, each of which will purchase eligible money market instruments, in exchange for cash financed from the MMIFF and asset-backed commercial paper (ABCP) (as described below). Eligible assets include U.S. dollar-denominated certificates of deposit, bank notes, and commercial paper with a remaining maturity of 90 days or less. Each SPV will purchase only debt instruments issued by 10 designated financial institutions, for a total of 50 different financial institutions (which have not yet been announced). Each financial institution must have a short-term debt rating of at least A-1/P-1/F-1 from two or more nationally recognized statistical rating organizations (NRSROs). At the time of any purchase by a SPV of a debt instrument of a financial institution, the debt instruments of that financial institution may not constitute more than 15 percent of the assets of the SPV.
Each SPV will issue to the seller of an eligible asset ABCP equal to 10 percent of the asset’s purchase price. The remaining 90 percent of the purchase price will be in cash. The ABCP will have a maturity equal to the maturity of the asset and will be rated at least A-1/P-1/F1 by two or more major NRSROs. The Federal Reserve Bank of New York (FRBNY) will lend to each SPV 90 percent of each eligible asset purchase price until the maturity of the asset. These loans will be senior to the ABCP, with recourse to the SPV, and secured by all the assets of the SPV. As a result, holders of the ABCP will bear the first loss, if any, on assets held by the SPV (such as if there is a downgrade or default by a financial institution).
An SPV will purchase eligible assets until April 30, 2009, unless extended by the Federal Reserve. On April 30, 2009 (unless extended), an SPV will start the process of winding down. During this process, proceeds from the maturation of the SPV’s assets on a given day will be used to first repay principal and interest on the FRBNY loans and then to repay principal and interest on the ABCP that matures on that day. A small fixed amount of any excess spread remaining in the SPV after completion of the wind-down process will be allocated proportionally among investors in the ABCP.
Eligible investors currently include only U.S. money market mutual funds, but the Federal Reserve has indicated that over time eligible investors may include other investors in short-term debt instruments.
The MMIFF is intended to complement two other liquidity facilities for commercial paper previously announced by the Federal Reserve: the Asset Backed Commercial Paper Money Market Fund Liquidity Facility and the Commercial Paper Funding Facility.