The Board of Governors of the Federal Reserve System ("Federal Reserve") has taken additional measures following the launch of the Money Market Mutual Fund Liquidity Facility ("MMLF") to address continuing liquidity concerns for securities held by money market mutual funds ("MMFs") resulting from market conditions related to the recent COVID-19 outbreak. For background on the MMLF and its establishment, please see our COVID-19 Response Blog post available here.

The Federal Reserve continues to implement an expansive and comprehensive COVID-19 relief program. The Federal Reserve has also published guidance related to the MMLF to aid MMFs and related market participants, and more guidance is expected in the coming days. Similarly, the US Securities and Exchange Commission ("SEC") has provided relief to MMFs and their affiliates to address ongoing liquidity issues due to COVID-19. Early reports indicate that market participants have shown interest in measures by the Federal Reserve and the SEC to support MMFs and the US economy as a whole.

Federal Reserve Expands COVID-19 Relief Program

The Federal Reserve decided on March 23, 2020 to expand its credit relief program to combat market disruptions resulting from COVID-19. 1 The enhancements to the Federal Reserve's relief program include:

  • The Federal Open Market Committee ("FOMC") will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, the FOMC will include purchases of agency commercial mortgagebacked securities in its agency mortgagebacked security purchases.
  • Support to the flow of credit to employers, consumers, and businesses through the establishment of new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund, will provide $30 billion in equity to these facilities.
  • Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility for new bond and loan issuance and the Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds.
  • Establishment of a third facility, the Term Asset-Backed Securities Loan Facility ("TALF"), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration, and certain other assets.
  • Facilitation of credit to municipalities by expanding the MMLF to include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit, and the Commercial Paper Funding Facility ("CPFF") to include high-quality, tax-exempt commercial paper as eligible securities. (In addition, the pricing of the CPFF has been reduced.) 2

Hopefully these measures, in tandem with the Federal Reserve's previous efforts, will sustain a healthy flow of credit to households and businesses and promote the Federal Reserve's Congressional mandate to promote maximum employment and stable prices.

Federal Reserve Publishes MMLF Guidance and Form Documents

On March 21, 2020, the Federal Reserve published MMLF FAQs about the program. 3 The MMLF FAQs highlight the basics of the MMLF, including the purpose and design of the MMLF, information about eligible borrowers, collateral requirements, accounting and regulatory implications, process and procedure, and various ancillary matters. The FAQs are part of an ongoing response that the Federal Reserve has been continually revising as it considers additional measures to address liquidity concerns. Since our last MMLF COVID-19 Response Blog post, the Federal Reserve has updated the list of securities that are eligible collateral for pledge under the MMLF. The list currently includes:

  • US Treasuries and fully guaranteed agency securities;
  • Securities issued by US governmentsponsored entities;
  • Asset-backed commercial paper, unsecured commercial paper or a negotiable certificate of deposit that is issued by a US issuer, is rated at the time purchased from the MMF or pledged to the Federal Reserve Bank of Boston ("FRBB") not lower than A1, F1, or P1 by at least two major nationally recognized statistical rating organizations ("NRSROs") or, if rated by only one NRSRO, is rated within the top rating category by that NRSRO;
  • US municipal short-term debt (excluding variable rate demand notes) that has a maturity not exceeding 12 months, and at the time of purchase or pledge to the FRBB: (i) is rated in the top short-term rating category (e.g., rated SP1, MIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; or (ii) if not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent, or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO;
  • Variable rate demand notes with a demand feature allowing holders to tender the note at their option within 12 months, and at the time purchased or pledged to the FRBB: (i) is rated in the top short-term rating category (e.g., rated SP1, VMIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; or (ii) if not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent, or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO; and
  • Receivables from certain repurchase agreements.4

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Footnotes

1 Federal Reserve announces extensive new measures to support the economy (Mar. 23, 2020), https://www.federalreserve.gov/newsevents/pressreleases/ monetary20200323b.htm

2 See Federal Reserve Launches Commercial Paper Funding Facility (Mar. 24, 2020), https://covid19.mayerbrown.com/government-federalreserve-launches-commercial-paper-funding-facility/

3 Money Market Mutual Fund Liquidity Facility FAQs (Mar. 21, 2020), https://www.federalreserve.gov/monetarypolicy/files/mmlffaqs.pdf

4 This list is subject to change as the Federal Reserve considers the feasibility of adding other asset classes.

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