Money Market Investor Funding Facility (US)

On September 16, 2008, the day after Lehman Brothers filed for bankruptcy, the $62 billion Reserve Primary Fund money market mutual fund (MMMF), which had a $785 million exposure to Lehman commercial paper (CP)that it wrote down to zero, “broke the buck” by announcing a net asset value (NAV) of less than $1 per share (Anderson and Gascon 2009). This quickly led to run-like redemption requests by many MMMF investors, especially institutional investors who fled prime MMMFs for those investing only in government securities. In the week following Lehman’s bankruptcy, investors withdrew $230 billion from MMMFs, including $117 billion from prime MMMFs, as they sought out funds investing only in government securities (Adrian, Kimbrough, and Marchioni 2011).

As MMMFs scrambled to raise cash to pay redemptions and maintain their $1 per share NAV^FNDuring the crisis, many fund sponsors provided significant assistance to their funds, at least 21 of which would have “broken the buck” without such aid (Brady, Anadu and Cooper (2012))., many funds refused to roll over maturing CP or purchase new CP, including asset-backed commercial paper (ABCP). Further, despite their need for cash, many funds resisted selling assets at depressed prices. Notably, ABCP represented approximately 45% of fund assets, but the secondary market was limited and experiencing increasing stress (Duygan -Bump, et al. 2013).

Further, despite their need for cash, many funds resisted selling assets at depressed prices. Notably, ABCP represented approximately 45% of fund assets, but the secondary market was limited and experiencing increasing stress (Duygan-Bump et al. 2013).

Because MMMFs were the largest investor group in CP, their actions led to a general contraction in the short-term wholesale funding market; within a month after Lehman’s bankruptcy, outstanding CP had declined by $300 billion (Adrian, Kimbrough, and Marchioni 2011). In addition, CP maturities became severely restricted and rates soon elevated sharply, particularly on longer-term paper, making it difficult, if not impossible, for many issuers to place their CP (Adrian, Kimbrough, and Marchioni 2011). These developments in turn disrupted the business and household financing supported by CP and ABCP, raising concern about possible contagion of the broader financial markets and economy (Adrian, Kimbrough, and Marchioni 2011).

On September 19, 2008, the government took steps to address the redemption stresses on MMMFs. The US Treasury Department announced the Temporary Guarantee Program for Money Market Funds (Temporary Guarantee),^FNSee McNamara 2016 for a discussion of the program. which offered to guarantee the accounts of eligible MMMFs choosing to participate against losses resulting from a fund breaking the buck. On that same day, the Federal Reserve (the Fed) announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF),^FNUnder the AMLF, the Federal Reserve Bank of Boston provided funding to US depository institutions to finance purchases of high-quality ABCP from MMMFs experiencing redemption pressures. The ABCP secured the loans, which were otherwise without recourse to the borrowing institutions. In its first weeks, the AMLF extended $152 billion in loans, but utilization soon decreased significantly. See Wiggins and Metrick 2016 for a discussion of the program. which provided loans to depository institutions to purchase CP from the MMMFs experiencing redemption pressures.

On October 21, 2008, with money markets still seized up, the Fed announced the Money Market Investor Funding Facility (MMIFF), which would indirectly fund 90% of the amortized purchase price of certain term money market assets from eligible investors. including MMMFs. The remaining 10% of the purchase price would be funded by subordinated ABCP issued pursuant to the program.

Under the MMIFF, the Federal Reserve Bank of New York (FRBNY) would loan funds to a series of special purpose vehicles (SPVs) established by the private sector, which would then purchase eligible assets from certain eligible money market investors. The eligible assets included US dollar–denominated certificates of deposit (CDs), bank notes, and commercial paper issued by 50 highly rated financial institutions that had remaining maturities of at least seven and not more than 90 days (FRBNY 2008a). Also, as of November 10, 2008, assets had to be eligible for settlement by the Depository Trust Company (DTC); later clearance was required. (FRBNY 2008a). A total of $540 billion was authorized for MMIFF loans, so it might have been possible for the program to finance the purchase of $600 billion of assets. The MMIFF complemented the other actions taken by the government to address MMMF distress and the frozen CP market.

Authority for the MMIFF

The Fed relied on its emergency authority under Section 13(3) of the Federal Reserve Act (FRA) in adopting the MMIFF. Section 13(3) allows a Reserve Bank to make loans to any individual, partnership, or corporation in “unusual and exigent circumstances” if the Fed determines that the entity is “unable to secure adequate credit accommodations from other banking institutions” and that such loans were secured to its satisfaction. In implementing the MMIFF, the Fed noted that “the short-term debt markets continued to be under considerable strain” and the difficulty being experienced by MMMFs in “selling assets to satisfy redemption requests and portfolio rebalancing needs” (Federal Reserve 2008c). The Fed hoped that stimulating a secondary market for money market instruments would give MMMFs confidence that they could meet liquidity needs for redemption requests, and that they would then restart investing in money market instruments and ultimately extend the terms of their investments (which were then largely being held to less than seven days) (Federal Reserve 2008c; FRBNY 2008a).

Original Proposal

As originally proposed, the MMIFF was to serve as a backup liquidity facility to the SPVs that would fund their purchases of eligible assets by issuing senior and subordinated ABCP. The original design was deemed favorable in two ways: (1) the Fed would have a “well-secured position”; and (2) industry participants might be more amenable to utilizing a facility that was privately managed (Federal Reserve 2008b). However, consultation with industry participants produced a substantial revision of the financing to be provided to the SPVs by the Fed, so that the Fed’s position shifted to being a direct lender instead of a backup (Federal Reserve 2008c).

The MMIFF was announced on October 21, 2008, and became operational on November 24. The facility was originally set to terminate on April 30, 2009; however, the Fed’s Board of Governors extended the termination date to October 30, 2009, when the MMIFF expired without being used.

How the MMIFF Was to Work

According to the FRBNY, under the MMIFF, five SPVs were to be established by JPMorgan Chase & Company (rather than by the Fed), which would be the program’s sponsor and manager of the conduits. JPMorgan was selected for this role by representatives from the MMMF industry (FRBNY 2008a).    

The SPVs would purchase money market instruments meeting certain criteria from investors, initially MMMFs, at amortized cost, and pay 90% of the purchase price in cash funded with loans from the FRBNY. The remaining 10% of the purchase price would be paid by the SPVs by issuing subordinated ABCP to the selling eligible investor.

It was anticipated that other banks and financial institutions would provide custodial, private placement and administrative services to the SPVs, but it is not clear if any such contracts were entered into (FRBNY 2008a).

FRBNY Loans

Each SPV was eligible to borrow from the FRBNY 90% of the amortized cost of “eligible assets” that it intended to purchase from “eligible investors” (both defined below). The FRBNY loans would be senior secured funding and collateralized by all the assets of the borrowing SPV, providing the FRBNY a 10% haircut. Additionally, the ABCP issued to the eligible investor by the SPV would be subordinated to the FRBNY loans and would absorb approximately the first 10% of any losses incurred by the SPV (FRBNY 2008c).

The FRBNY loans would be overnight loans, but the FRBNY committed to funding the purchased assets until their maturity (FRBNY 2008c). The loans would bear interest at the primary credit rate, with certain limited subordination if the rate increased above a specified amount.^FN“Specifically, if the primary credit rate rose above 50 basis points plus the lower of (i) the current primary credit rate and (ii) the primary credit rate 90 days before (the subordination threshold), the FRBNY’s right to receive interest above the threshold rate would be subordinated to the rights of the ABCP holders to receive principal and interest” (FRBNY 2009b). Any excess spread earned by the SPVs with respect to the yield on the purchased assets would be retained as a further buffer against FRBNY losses (FRBNY 2008c).

The SPVs would be authorized to purchase, in aggregate, up to $600 billion in eligible assets, indicating that the FRBNY was authorized to provide up to $540 billion in loans.

Asset-Backed Commercial Paper (ABCP)

With respect to each purchase of eligible assets, the SPV would also issue to the eligible investor ABCP equaling 10% of the purchase price (amortized cost) of the eligible asset. The ABCP would be subordinated to the FRBNY loans and had to be rated at least A-1/P-1/F1 by two or more major nationally recognized statistical rating organizations (NRSROs), e.g., S&P, Moody’s, and Fitch.^FNInitially, the agencies were not named, but the specific agencies were added as of January 7, 2009 (FRBNY 2009c).

The SPV was required to hold the purchased eligible asset until maturity. When it received payment from the issuer of the asset, it would then repay the loan to the FRBNY. When all the eligible assets had matured and all FRBNY loans were repaid, the SPV would redeem the ABCP.

The ABCP was to bear interest at a rate that was at least 25 basis points below the interest rate of the eligible asset sold. This provided an additional cushion of collateral for the FRBNY’s loans as they were secured by all the assets of the SPV. Upon the SPV being wound down, an eligible investor would retain a right to receive a possible contingent distribution of funds that would increase its total yield (including its yield on the ABCP) up to 25 basis points above the yield on the eligible asset that it sold, if there was accumulated income available in the SPV. In this way, an eligible investor that used the MMIFF retained some possibility of sharing in the upside appreciation of the eligible assets that it sold. However, only an eligible investor that sold an eligible asset to the SPV had the right to receive any contingent distribution; the right was not transferable and did not apply to a person who purchased the ABCP in the secondary market (FRBNY 2008a).

Eligible Investors

The MMIFF was open, and originally limited to, any fund that qualified as a US 2a-7^FNSecurities and Exchange Commission Rule 2a-7 issued pursuant to the Investment Company Act of 1940. MMMF (FRBNY 2008a). MMMFs were originally the only eligible investors for two reasons: (1) the purpose of the facility was to provide liquidity to MMMFs; and (2) the “key role money market mutual funds play as a source of short-term credit for financial and nonfinancial corporations” (FRBNY 2008a).

However, it was always intended that eligibility might be extended to other money market investors, and on January 7, 2009, the category of eligible investors was expanded to include, in addition to US 2a-7 MMMFs:

1. US-based securities-lending cash collateral reinvestment funds, portfolios, and accounts (securities lenders);^FN“Eligible investors will also include any US dollar-denominated cash collateral reinvestment fund, account, or portfolio associated with securities lending transactions that is managed or owned by a US bank, insurance company, pension fund, trust company, or SEC-registered investment advisor.” (FRBNY 2009a) and
2. US-based investment funds that operated in a manner like MMMFs, such as certain local government investment pools, common trust funds, and collective investment funds.^FN“In addition to US 2a-7 money market mutual funds, eligible investors will include funds that are managed or owned by a US bank, insurance company, pension fund, trust company, SEC-registered investment advisor or a US 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 (A and above) or the top two short-term investment-grade rating categories (A-2 and above), or that are the credit equivalent thereof.” (FRBNY 2009a)

The FRBNY was authorized to vet potential eligible investors, including subjecting them to debt and/or deposit rating criteria (FRBNY 2008a).

Eligible Assets

Eligible assets that an SPV could purchase were initially limited to US dollar—denominated certificates of deposit, bank notes, and CP issued by highly rated financial institutions and having remaining maturities of 90 days or less. This wording permitted even assets with overnight maturities to be eligible assets, contrary to the facility’s stated purpose of easing the constraints in the short-term funding market. Therefore, the criteria were refined, as of November 10, 2008, to require that an eligible asset have a remaining maturity of at least seven and not more than 90 days (FRBNY 2008b). 

Eligible assets also had to be at least $250,000 in value. The MMIFF did not limit how much any eligible investor could sell to an SPV.

Additionally, as of November 10, 2008, eligible assets had to be eligible for settlement at the DTC (FRBNY 2008b). This criterion was later refined to require clearance by DTC, not just settlement (FRBNY 2009a). As of January 7, 2009, eligible assets were required to have a yield of at least 60 basis points above the primary credit rate at the time of purchase by the SPV to provide some additional protection to the FRBNY, which was to be paid the primary credit rate for its loan (FRBNY 2008b).

Under the MMIFF, each SPV could purchase only debt instruments issued by the 10 financial institutions designated in its operational documents as issuers. Issuers were required to have a short-term debt rating of at least A-1/P-1/F1 from two or more NRSROs, and they were chosen by representatives of the MMMF industry largely because, (i) they represented the largest issuers of highly rated short-term liabilities held by MMMFs, and (ii) they met an objective of achieving geographical diversification in each SPV. (FRBNY 2008b).  Designated issuers included most of the largest North American and European financial institutions, including Bank of America Corp., General Electric Co., BNP Paribas SA, and Société Générale SA. (FRBNY 2008b; NASDAQ, n.d.). The Fed also indicated that it might consider expanding the list of issuers but only after reviewing the operations of the MMIFF (FRBNY 2008B). 

Downgrade or Default of an Eligible Asset

If an eligible asset held by an SPV was downgraded, the SPV would cease all asset purchases until all the SPV’s assets issued by that issuer had matured. 

If there was a payment default with respect to any eligible assets held by an SPV, the SPV would cease all asset purchases and repayments on outstanding ABCP. Proceeds from maturation of the SPV’s assets were to be used to repay the FRBNY, and upon maturation of all assets in the SPV, any remaining funds could be used to repay principal and interest on the ABCP.

Termination and Wind-Down Process

During any wind-down period, an SPV could not purchase any new assets, however, the FRBNY would continue to fund eligible assets held by an SPV during the wind-down process (FRBNY 2008a). During wind-down, an SPV could use proceeds from maturing assets to repay principal and interest on the FRBNY loans and then to repay principal and interest on ABCP that matured on that day (FRBNY 2008a). Upon completion of the wind-down process, if there were assets remaining, any contingent payment would be paid to the eligible investors and the FRBNY would receive any remaining amounts (FRBNY 2008a). 

Announced on October 21, 2008, the MMIFF complemented the other programs instituted by the government to provide liquidity and stability to MMMFs and promote liquidity in the CP markets, the Treasury’s guarantee and the Fed’s AMLF.^FNSee page 1 and accompanying footnotes. While other programs, such as the AMLF and the CPFF^FNThe CPFF provided a liquidity backstop to US issuers of CP. The FRBNY would make loans to an SPV (that it sponsored) at above-market interest rates to purchase eligible unsecured CP and ABCP from eligible issuers. The loans were secured by all the assets of the SPV. Holdings of the CPFF grew to $334 billion by year-end 2008, when usage slowed. However, the CPFF was one of the Fed’s largest liquidity programs. (See also Wiggins 2016 and Wiggins and Metrick 2016.) saw significant use in the fall of 2008 and modest usage thereafter, no investor took advantage of the MMIFF.

Under the AMLF^FNSee Wiggins and Metrick 2016 for detailed discussion of the AMLF. (announced a month prior to the MMIFF), the Federal Reserve Bank of Boston (FRBB) provided funding to US depository institutions to purchase high-quality ABCP from MMMFs experiencing redemption pressures. The ABCP secured the loans, which were otherwise without recourse to the borrowing institutions. Because the Fed made loans to depository institutions, which then purchased the ABCP, the Fed could make the AMLF operational in a few days by relying on much of its existing discount window lending structure. Although the AMLF was adopted without any authorized limit, it permitted loans only for purchases of ABCP. The continuing liquidity problems of the MMMFs were perceived as greater than the relief the AMLF could provide, and thus the MMIFF, which provided a market for a variety of securities held by MMMFs, was adopted (Federal Reserve 2008c). Although the MMIFF carried a spending limit, its capacity to finance the purchase of $600 billion in eligible assets sent a strong message that the Fed was committed to supporting the money markets.

The MMIFF was originally established with an expiration date of April 30, 2009. Although not utilized, the Fed extended the program three times, indicating its commitment to maintaining the availability of liquidity while markets remained stressed (Federal Reserve 2009b). The MMIFF expired on October 30, 2009.