The Federal Reserve has established a webpage https://www.federalreserve.gov/monetarypolicy/mmlf.htm that provides links to a FAQ and other documents for the Money Market Fund Liquidity Facility (MMLF) described in our March 20, 2020 Client Alert Federal Reserve Announces Money Market Fund Liquidity Facility (Original Client Alert), as updated by our March 24, 2020, Client Alert Federal Reserve Amends Money Market Fund Liquidity Facility to Include Additional Collateral (Updated Client Alert).1
The FAQ is available at this link https://www.federalreserve.gov/monetarypolicy/files/mmlf-faqs.pdf and is also attached as Attachment I.
Consistent with the 2008 AMLF program mentioned in our Original Client Alert, question and answer C.3 on page 6 of the attached FAQ explains that commercial paper must be purchased from a money market fund (MMF) at “amortized cost.”2 As with the AMLF program, this ensures the MMF receives “par”3 for the commercial paper it sells under the facility. This emphasizes the question we raised in our Original Client Alert whether the MMLF will be useful for commercial paper owned by MMFs purchased between roughly March 4 and March 13, since such paper typically sold at a price to yield less than the 1.25% interest rate for loans under the MMLF.4
Other documents posted on the Federal Reserve webpage for the MMLF program include documents that must be completed by the MMF from which a bank, broker-dealer or other eligible borrower under the MMLF purchases the relevant collateral. Among other things, this includes a form of certificate attached as Attachment II, which requires the MMLF to certify it “is unable to secure adequate credit accommodations from other banking institutions.” The form, however, also states: “Lack of adequate credit does not mean that no credit is available. Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.”
- The Federal Reserve Bank of Boston maintains a separate webpage https://www.bostonfed.org/news-and-events/news/2020/03/key-information-money-market-mutual-fund-liquidity-facility.aspx describing the facility that links to the Federal Reserve webpage with the FAQ and other program documents.
- As we noted in our Updated Client Alert, this requirement was not contained in the term sheet attached as Attachment I to the Updated Client Alert.
- The MMF’s “amortized” cost or book value for the commercial paper.
- As explained in our Original Client Alert, “At 1% above the primary credit rate, loans to finance purchases of private commercial paper will currently bear interest at 1.25%... In general, following the FOMC’s March 3, 2020, 50 bps reduction in the target federal funds rate commercial paper rates were below 1.25%” until “commercial paper rates spiked above 1.25% on March 16.” This was generally true for both financial and nonfinancial commercial paper. The Federal Reserve’s April 2, 2020, H.15 release https://www.federalreserve.gov/releases/h15/, which updates each business day at 4:15 pm, shows 2 month nonfinancial commercial paper sold at 1.13% on March 30 and at 1.09% on April 1, but other maturities for nonfinancial CP and all reported prices for other dates from March 26 through April 1 (and all reported prices for financial CP) were above a 1.25% yield.