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The following is intended to address operational questions about the Money Market Investor Funding Facility (MMIFF).
Effective February 3, 2009
Why is the Federal Reserve establishing the MMIFF? The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have been increasing their liquidity positions by investing in shorter-term—frequently overnight—assets. By facilitating sales of money market instruments in the secondary market, the MMIFF should give money market mutual funds and other money market investors confidence that they can extend the terms of their investments and still maintain appropriate liquidity positions. Greater access to term financing from money market investors will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.
How will the MMIFF work? The Federal Reserve Bank of New York will provide senior secured funding to a series of special purpose vehicles established by the private sector (SPVs) to finance the purchase of certain money market instruments from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit, bank notes and commercial paper issued by highly rated financial institutions. Assets must be DTC cleared and have remaining maturities of at least 7 days and no more than 90 days. Eligible investors will include U.S. 2a-7 money market mutual funds and certain other money market investors. Each SPV will finance its purchases of eligible assets by selling asset-backed commercial paper (ABCP) and by borrowing under the MMIFF. The SPV will issue to the seller of the eligible asset subordinated ABCP equal to 10 percent of the asset’s purchase price. The ABCP will be rated at least A-1/P-1/F1 by two or more major nationally recognized statistical rating organizations (NRSROs), S&P, Moody’s and Fitch, respectively. The New York Fed will lend to each SPV, on a senior secured basis, 90 percent of the purchase price of each eligible asset. The SPVs will hold the eligible assets until they mature, and proceeds from the assets will be used to repay the Federal Reserve loan and the ABCP.
When will the MMIFF become operational? The New York Fed will begin funding SPV purchases of eligible money market instruments in connection with the MMIFF on November 24, 2008.
What is the minimum size for assets to be sold into the SPVs? Each asset sold to each SPV must have a minimum size of $250,000.
How is the Federal Reserve protected against loss? The New York Fed loans under the MMIFF will be fully collateralized by all of the assets of the SPVs. These assets will be short-term, high-credit-quality debt instruments. In addition, the ABCP issued by each SPV and held by the investors will be subordinated to the New York Fed loans and will absorb approximately the first ten percent of any losses incurred by the SPV. Any excess spread earned by the SPVs will be paid to the New York Fed as a further buffer against loss.
How many SPVs will be established to borrow under the MMIFF? The MMIFF will be initially authorized to lend to five SPVs.
How big will the MMIFF be? The SPVs will be authorized, in total, to purchase a maximum amount of $600 billion in eligible assets. Since the New York Fed will provide 90 percent of the financing of the SPVs, Federal Reserve lending could total $540 billion.
What investors will be eligible to sell assets to SPVs participating in the MMIFF? In addition to U.S. 2a-7 money market mutual funds, eligible investors will include funds that are managed or owned by a U.S. bank, insurance company, pension fund, trust company, SEC-registered investment advisor or a U.S. state or local government entity and are required to (i) maintain a dollar-weighted average portfolio maturity of 90 days or less; (ii) hold the fund's assets until maturity under usual circumstances; and (iii) hold only assets that, at time of purchase, are rated by an NRSRO in one of the top three long-term investment-grade rating categories (e.g., A and above) or the top two short-term investment-grade rating categories (e.g., A-2 and above), or that are the credit equivalent thereof. Eligible investors will also include any U.S. dollar-denominated cash collateral reinvestment fund, account, or portfolio associated with securities lending transactions that is managed or owned by a U.S. bank, insurance company, pension fund, trust company, or SEC-registered investment advisor. Eligible investors will be subject to approval by the New York Fed prior to participation, and may be subject to debt and/or deposit rating criteria.
What steps should eligible investors take to participate in the MMIFF? Any eligible investor that seeks to participate in the MMIFF should contact its J.P. Morgan account representative or call J.P. Morgan at 212-834-5389 to obtain MMIFF program information, including the list of assets eligible for purchase, required documentation and operating procedures. The documentation will include the Fund Representation Letter and an Asset Allocation Spreadsheet. One Fund Representation Letter is required for each eligible investor (each fund must provide a separate form). In addition, each eligible investor will need to submit an IRS form W-9. Eligible investors can also obtain portfolio holdings of each SPV and the Private Placement Memorandum for the ABCP notes through J.P. Morgan.
Which assets are eligible to be sold to SPVs participating in the MMIFF? Each SPV will purchase U.S. dollar-denominated certificates of deposit, bank notes, and commercial paper. Assets must be DTC cleared with a remaining maturity of at least seven days and no more than 90 days. Assets must have a yield of at least 60 basis points above the primary credit rate at the time of purchase by the SPV. Each of the five SPVs will only purchase debt instruments issued by ten financial institutions designated in its operational documents. Each of these financial institutions will have a short-term debt rating of at least A-1/P-1/F1 from two or more major NRSROs (S&P, Moody’s and Fitch, respectively).
How were the fifty financial institutions chosen? The fifty financial institutions were chosen by representatives of the U.S. money market mutual fund industry. The financial institutions were chosen primarily because they are among the largest issuers of highly rated short-term liabilities held by money market mutual funds, but also with an objective of achieving geographical diversification in each SPV. The financial institutions include most of the largest global North American and European financial institutions.
Does the Federal Reserve intend to expand the MMIFF beyond debt instruments of these fifty financial institutions? The Federal Reserve may consider such an expansion, however it will assess the effects of the MMIFF before expanding the MMIFF’s coverage.
What will be the rate of return on the ABCP? Eligible investors will sell eligible assets to the SPVs at amortized cost. Investors will initially earn an interest rate on the ABCP they receive that is at least 25 basis points below the interest rate on the assets they sell. When a SPV is wound down, it is possible that each eligible investor that sold assets to the SPVs will receive a contingent distribution of funds, to the extent there is available accumulated income in the SPV, which will increase the total yield to the investor (including the yield on the investor’s ABCP up to 25 basis points above the yield on the assets it sold to the SPV). The right to receive any contingent distributions applies only to eligible investors who sell assets to the SPVs, is not transferable and does not apply to persons who purchase ABCP in the secondary market.
At what rate will the Federal Reserve lend to the SPVs under the MMIFF? The New York Fed will lend to the SPVs at the primary credit rate. Information on the current primary credit rate is available from the Federal Reserve System’s discount window web site (http://www.frbdiscountwindow.org/index.cfm). In order to reduce the interest rate risk of the SPVs, however, the Federal Reserve has agreed to subordinate its right to receive certain amounts of potential interest payments. Specifically, if the primary credit rate rises above the subordination threshold, the New York Fed’s right to receive interest above the threshold rate will be subordinated to the rights of the ABCP holders to receive principal and interest. The subordination threshold will be equal to 50 basis points plus the lower of (i) the current primary credit rate and (ii) the primary credit rate 90 days before. In other words, the subordination threshold will immediately and automatically decrease to track any declines in the primary credit rate and will increase automatically 91 days after any increase in the primary credit rate. Any accumulated income in a SPV not distributed to investors will accrue to the New York Fed.
What role will the private sector play in the MMIFF? J.P. Morgan will be the structuring agent and referral agent for the SPVs; it was chosen for this role by representatives of the money market mutual fund industry. Other financial institutions will provide custodial, private placement and administrative services to the SPVs.
Is there any limit on how much an investor may sell to the SPVs participating in the MMIFF? The MMIFF program documents will not limit how much a single investor may sell to a SPV, but SEC Rule 2a-7 under the Investment Company Act will place quantitative limits on the ability of money market mutual funds to sell assets to the SPVs.
Over what time period will the MMIFF operate? The SPVs began purchasing eligible assets on November 24, 2008 and will cease purchasing assets on October 30, 2009, unless the Board of Governors of the Federal Reserve System extends the MMIFF. The New York Fed will continue to fund the SPVs after such date until the SPVs’ underlying assets mature.
What is the relationship between the CPFF and the MMIFF? The MMIFF complements the CPFF. The CPFF will finance an SPV's purchase of three-month commercial paper from issuers at interest rates chosen to be above market rates in more normal times, assuring participating issuers that they need pay no more than the CPFF rates to roll over their commercial paper. The MMIFF will tend to pull down short-term debt rates by relieving some of the balance sheet pressures on money market investors. Both the MMIFF and the CPFF are intended to improve liquidity in short-term debt markets and thereby increase the availability of credit for businesses and households.
What is the relationship between the AMLF and the MMIFF? The AMLF finances the purchases of ABCP by banking organizations with loans from the Federal Reserve Bank of Boston at the primary credit rate. The loans are collateralized by the ABCP but are without recourse to the borrowing banking organization. Under the MMIFF, the New York Fed’s loans are collateralized by a different set of money market instruments and are with recourse to the borrowing SPV. Both the AMLF and the MMIFF are intended to facilitate the sale of assets by money market mutual funds in the secondary market to increase their liquidity and encourage them to lend at longer maturities, but the MMIFF facilitates the sale of a different set of assets than the AMLF.
What is the legal basis for the MMIFF? The MMIFF is authorized under section 13(3) of the Federal Reserve Act, which permits the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations.
How will the Federal Reserve report lending under the MMIFF? Balance sheet items related to the MMIFF will be reported on the H.4.1 weekly statistical release entitled “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” There will be an explanatory cover note on the release when items are added.
Where should questions regarding the MMIFF be directed? Questions should be directed to the New York Fed’s Public Affairs department: 212-720-6130.