# Public Information – Released November 9, 2020 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A973e5892b9dbdb62 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Public Information – Released November 9, 2020 Primer: Money Market Funds and the Commercial Paper Market Viktoria Baklanova, Isaac Kuznits, Trevor Tatum 1 What is commercial paper? Commercial paper (CP) is unsecured, short-term debt issued for a specified amount to be paid at a specified date. CPs are issued at a discount, with minimum denominations of $100,000 and terms normally ranging from 1 to 270 days. Figure 1: CP outstanding declined sharply after the financial crisis and stayed at around $1 trillion $ trillion 2.5 2.0 What is the size of the U.S. CP market? 1.5 Total U.S. CP outstanding was at $1,007 billion at the end of June 2020, down by $37 billion since the end of 2019 (Figure 1). This is around one half of $2.2 trillion, the all-time high in CP outstanding reached in July 2007. The majority of the decline in CP outstanding since the financial crisis can be attributed to reduction in the asset-backed commercial paper (ABCP) issuance. 1.0 Non-U.S. financials and others Nonfinancials U.S. financials (ex-ABCP) ABCP 0.5 0.0 Mar Mar Mar Mar Mar Mar Mar 2000 2003 2006 2009 2012 2015 2018 Source: Financial Accounts of the United States as of Jun 2020 Who are the main CP issuers? As of June 2020, ABCP outstanding were at $214 Figure 2: Nonfinancials account for the largest share of billion accounting for 21% of the total CP outstanding CP holdings at 25% followed by MMFs at 22% Nonfinancials Money market funds (Figure 1). CP issued by U.S. financial firms were at Mutual funds State and local governments $189 billion (or 19% of the total); CP issued by Pensions Other financials Others nonfinancial firms were at $166 billion (or 17% of the 100% total); and non-U.S. financial and other firms were at 80% $438 billion (or 43% of the total). Who are the main investors in the CP market? 60% Many types of institutional investors participate in the CP market, including investment companies, retirement accounts, state and local governments, financial and nonfinancial firms. As of June 2020, nonfinancial firms were the largest investors accounting for 25% of the total CP market followed by money 40% 20% 0% Mar Mar Mar Mar Mar Mar Mar 2000 2003 2006 2009 2012 2015 2018 Source: Financial Accounts of the United States as of Jun 2020 This is a report by the staff of the Division of Investment Management’s Analytics Office of the U.S. Securities and Exchange Commission (Commission). The Commission, as a matter of policy, disclaims responsibility for any private publication or statement of any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or other members of the Commission staff. If you have any questions or comments about this report, please contact Viktoria Baklanova (baklanovav@sec.gov), Isaac Kuznits (kuznitsi@sec.gov), or Trevor Tatum (tatumt@sec.gov) in the Division of Investment Management’s Analytics Office. 1 1 Public Information – Released November 9, 2020 market funds (MMFs) at 22% (Figure 2). Investments Figure 3: Total MMF assets reached $5.2 trillion by financial firms were at 19% of the total. Other large in April, up 29% from February levels CP investors are mutual funds (ex-MMFs) at 10%, state $ trillion and local governments at 7% and pension accounts at 6 Government 5%. The “Others” category includes smaller CP 5 Tax-Exempt investors that collectively account for around 13% of Prime 4 the total CP outstanding. The investor base in the CP market has changed 3 over time. For example, MMFs used to account for a substantially larger share of the CP market at close to 2 47% in September 2001. Over the last 20 years, MMF 1 participation in the CP market has declined markedly. One reason for the decline is that assets under 0Nov Jul Mar Nov Jul Mar management in government MMFs, which do not invest 2010 2012 2014 2015 2017 2019 in the CP market, have grown (Figure 3). 2 Assets in Source: Form N-MFP prime MMFs have declined resulting in lower demand for CP from MMFs. 3 On the other hand, CP investments of nonfinancial corporations have increased almost six-fold since 2000 to $250 billion in June 2020 (or 25% of the total CP market) from $46 billion in March 2000 (or 3% of the total CP market). What happened in the CP market in mid-March 2020? In mid-March 2020, CP rates increased, which is normally associated with a lack of investor demand (Figure 4). However, the broad scope of market developments at the onset of the COVID-19 pandemic complicates the attribution analysis. Corporate investors in the CP market may have reduced their allocations in anticipation of reduction in revenues. MMFs and mutual funds may have decreased their CP investments in anticipation of investor redemptions. Available data show that prime MMFs and short-term and ultra-short corporate bond mutual funds Figure 4: CP rates spiked in mid-March, but experienced significant outflows in March (Figures 5 remained subdued in the recent months and 6). Prime MMFs lost around 11% of their net assets % 3M AA nonfinancial CP in March. Similarly, short-term and ultra-short bond 3M AA financial CP 2.5 Interest on bank reserves mutual funds lost around 10% of their assets. Reverse repo facility 2.0 At the same time, some CP issuers may have turned to the CP market to bridge their funding needs. Overall, the CP outstanding increased in the first quarter of 2020 by $44 billion, despite the spike in the CP rates. During the second quarter, CP issuers had fewer immediate 1.5 1.0 0.5 0.0 Oct 2019 Dec 2019 Feb 2020 Apr 2020 Jun 2020 Aug 2020 Oct 2020 Sources: Bloomberg, Federal Reserve 2 Government MMFs invest 99.5% or more of their total assets in short-term Treasury securities, securities issued by governmental agencies, repurchase agreements backed by these securities, or cash. 3 Prime MMFs can invest in a broad range of short-term, high quality assets such as U.S. Treasury bills, federal agency notes, certificates of deposit, corporate commercial paper, repurchase agreements, and obligations of states, cities, or other types of municipal agencies. 2 Public Information – Released November 9, 2020 borrowing needs amidst reduced economic activity and the CP outstandinding declined by $82 billion. 4 Figure 5: Prime MMFs saw large redemptions in March and reversal of flows in subsequent weeks $ billion Figure 6: Short-term and ultrashort corporate bond mutual funds experienced significant outflows in March and reversal of flows in subsequent months $ billion 40 20 0 0 -40 Institutional -80 -120 Retail 3/6 3/27 4/17 5/8 5/29 6/19 7/10 7/31 8/21 9/11 Note: Weekly asset changes take into account asset flows and valuation changes. Source: Form N-MFP -20 -40 -60 Mutual funds (ex ETFs) ETFs Jan Feb Mar Apr May Jun Jul Aug Sep 2020 2020 2020 2020 2020 2020 2020 2020 2020 Note: ETF - exchange-traded funds. Source: Morningstar What was the impact of the Federal Reserve’s Money Market Fund Liqudity Facility? The Federal Reserve established the Money Market Mutual Fund Liquidity Facility (MMLF) on March 18, 2020, to broaden its program of support for the flow of credit to households and businesses. 5 MMLF makes loans available to banks to finance assets purchased from prime and tax-exempt MMFs. MMLF started its operations on March 23 and initially intended to provide loans for purchases of CPs, but was extended to included purchases of certificates of deposit (CDs) and certain municipal securities. MMLF also enabled banks that purchased assets from affiliated MMFs to finance these purchases with loans from MMLF. In addition, since March, financial regulatory agencies have announced multiple emergency relief provisions for banks, advisers and funds. Following these actions, both market conditions and broader economic conditions in the U.S. appeared to improve. The outstanding amount of MMLF loans has been declining since April. The maximum MMLF utilization reached $51 billion in the first two weeks of April, or under 5% of the net assets in eligible MMFs. For context, lending by a similar Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) utilized in September 2008 reached about $150 billion in its first 10 days of operation, or around 7.5% of assets in prime MMFs at that time. 6 As of September 30, 2020, the total amount of oustanding MMLF loans was around $7 billion; MMLF accrued revenues from interest and fees 4 Additional information about the effects of the COVID-19 economic shock on the CP market can be found in the SEC staff report entitled “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock.” 5 See the description of MMLF. In the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748, CARES Act), signed into law as P.L. 116-136 on March 27, 2020, Congress appropriated up to $500 billion for the Treasury’s Exchange Stabilization Fund (ESF) to support Fed programs and temporarily permitted the use of the ESF to guarantee the money market fund industry. With respect to MMLF, the ESF provided $10 billion as credit protection to the Fed. 6 See analysis of AMLF utilization here. 3 Public Information – Released November 9, 2020 to the Federal Reserve were around $166 million. 7 Initially MMLF was scheduled to stop providing new loans after September 30, 2020, but was recently extended by three months through December 31, 2020. See “Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act,” October 7, 2020. 7 4 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A973e5892b9dbdb62. Public record. Not legal advice.