In an effort to calm historic levels of market volatility, the Fed re-launched two emergency lending facilities that were last used to successfully manage the 2008 crisis. After opening the Commercial Paper Funding Facility (CPFF) in the morning, the Fed announced the Primary Dealer Credit Facility (PDCF) after market close. The facilities, which make use of two out of the four lending facilities established during the crisis, were re-launched as signs of liquidity pressures stemming from the expected negative economic impact of the coronavirus outbreak began to appear. Yesterday’s actions followed the sweeping steps taken by the Fed on March 15 that moved interest rates to zero and injected a significant amount of liquidity into money and credit markets.
Both facilities serve as backstop sources of liquidity and were established to facilitate the availability of credit to businesses and consumers – the CPFF addressed the commercial paper market and the PDCF addressed the repo market, the secured funding market where primary dealers and others normally obtain much of the financing for their securities holdings.
The PDCF, which goes into effect on March 20, will allow primary dealers—banks and securities broker-dealers that trade U.S. government and other securities with market participants and the Federal Reserve Bank of New York—to borrow from the New York Fed on a collateralized basis in times of market stress. Of particular interest for the ABS market, below are the types of securities eligible to be pledged as collateral under the PDCF – apart from collateral types eligible under Open Market Operations – according to the Fed’s term sheet:
- Only AAA-rated securities are accepted for the following: commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs), and collateralized debt obligations (CDOs).
- Investment grade securities (BBB- and above) are accepted for ABS and MBS securities
- Commercial paper rated both A1/P1 and A2/P2 are also accepted.
With regard to borrower eligibility, only primary dealers of the New York Fed are eligible to participate in the PDCF. The list of eligible dealers is available on the Federal Reserve Bank of New York’s web site here.
We are in unprecedented territory, and the Fed has taken unprecedented steps to restore confidence and calm to the markets. This “whatever it takes” approach has been the battle cry for the Fed. “We are prepared to use our full range of tools to support the flow of credit to households and business,” Fed Chairman Powell reassured the markets on March 15, “ to help keep the economy strong, and to promote our maximum employment and price stability goals.” SFA will continue to monitor this fast-evolving situation and its impact on the securitization markets.