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:
FAQs: January 7, 2009 ››