Secondary Market Corporate Credit Facility (SMCCF)

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Secondary Market Corporate Credit Facility (SMCCF)

The Federal Reserve introduced the Secondary Market Corporate Credit Facility (SMCCF) on March 23, 2020, to strengthen the corporate bond market in the aftermath of the COVID-19 crisis. The SMCCF acquired investment-grade corporate bonds and bond ETFs in the secondary market in the United States. The theory was that if banks understood there was a robust secondary market where they could sell their debt, they would be more eager to lend to firms. On April 9, 2020, the program was extended to encompass the acquisition of additional bonds and bonds of lesser credit rating.

The SMCCF began acquiring bond ETFs on May 12, 2020, and said that it will begin purchasing individual bonds on June 16, 2020, to construct a “wide, diversified market index” of individual U.S. corporate bonds.

The Fed’s Primary Market Corporate Credit Facility was a similar effort (PMCCF).The Fed acquired $750 billion in bonds as part of the two programmes.

Treasury Secretary Steven Mnuchin said on November 19, 2020, that he will not approve extending the SMCCF beyond December 31, 2020. After December 31, 2020, the SMCCF will no longer purchase bonds or ETFs.

Key Takeaways

  • The Fed was attempting to keep banks lending to companies.
  • The SMCCF (Secondary Market Corporate Credit Facility) purchased corporate bonds and bond ETFs.
  • It boosted lending by assuring secondary market demand for corporate bonds.
  • On May 12, 2020, the program began purchasing bond ETFs, and on June 16, 2020, it began purchasing individual bonds.
  • After December 31, 2020, the SMCCF will no longer purchase bonds or ETFs.
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Details on the SMCFF

The Secondary Market Corporate Credit Facility (SMCCF) was a special purpose vehicle that bought bonds in the secondary market. The US Department of Treasury made a $25 billion first investment in the SMCCF. The bonds owned by the SMCCF served as security for the Fed’s loans to it.

The SMCCF was administered and loaned to by the Federal Reserve Bank of New York (FRBNY). Corporate bonds eligible for acquisition by the SMCCF were to be issued by US companies with significant operations in the US and were not anticipated to receive direct government financial support. The SPV also acquired shares in US-listed ETFs, the majority of which held investment-grade US corporate bonds.

Eligible bonds must also have a rating of at least BBB- or Baa3 as of March 22, 2020, from a major nationally recognized statistical rating organization (NRSRO), or from at least two major NRSROs if rated by more than one. If the bonds’ credit ratings were reduced after March 22, they had to be rated BB-/Ba3 by two or more NRSROs at the time the facility purchased them. All individual bonds acquired have to have a remaining maturity of no more than five years.

The SMCCF was likewise barred from lending to issuers who got special treatment under the CARES Act or any later federal legislation. Companies were also required to comply with the CARES Act’s section 4019 conflict of interest regulations. They might also not be classified as a depository institution under the Dodd-Frank Act.

The SMCCF did not own more than 10% of a corporation’s bonds or 20% of an ETF’s assets.

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The SMCCF purchased corporate bonds at their fair market value. The SPV avoided buying shares in ETFs whose market prices “materially exceeded[ed]” their net asset values (NAVs).

After December 31, 2020, the SMCCF will no longer purchase bonds or ETFs. This SPV will be funded by the New York Fed until its assets mature or are sold.

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