The Commercial Paper Funding Facility, Explained

The Commercial Paper Funding Facility, or CPFF, is one of several lending facilities established by the Federal Reserve to support the economy through the Coronavirus Pandemic.

But what is commercial paper? Why is the commercial paper market important to households and businesses and the overall economy? And how does the Commercial Paper Funding Facility actually work?

Commercial paper is like a short-term IOU issued by companies and local governments, used to raise money that directly supports a wide range of economic activity—like providing financing for auto loans, and meeting the issuers’ day-to-day operational needs such as payments for inventories and payrolls.

The Coronavirus Pandemic has been disrupting U.S. economic activity, and in March, 2020, the commercial paper market came under considerable strain.

Investors became reluctant to make purchases, causing the cost or “premium” that commercial paper issuers pay to borrow to surge to levels not seen since the financial crisis of 2008.

In addition, many firms reported being unable to issue commercial paper with a term of longer than a week, which increases the risk that some companies might have trouble maintaining stable funding to support their basic operations.

As the nation navigates this challenging period, improving the commercial paper market means enhancing the ability of businesses to maintain employment and operations.

That’s where the Commercial Paper Funding Facility comes in.

The CPFF is designed to make short-term funding available to issuers with good credit. This provides assurance to both issuers and investors that businesses and municipalities will be able to replace their maturing commercial paper with new commercial paper.

The CPFF does this by providing a liquidity backstop to U.S. issuers of commercial paper through a dedicated funding vehicle. In the event that issuers have trouble selling their paper in the financial market, this vehicle purchases eligible debt using financing provided by the New York Fed. The dedicated funding vehicle then holds the commercial paper until maturity. The proceeds from maturing commercial paper are used to repay the loan from the New York Fed.

Simply providing the assurance that a backstop is in place to buy high quality commercial paper promotes confidence in the commercial paper market, and supports the flow of cash to businesses and municipalities that need it.

Ensuring the smooth functioning of the commercial paper market, particularly in times of strain, means providing credit that supports families, businesses, and jobs across the economy.

For more information, visit nyfed.org/cpff.