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Lehman Playbook Continues: Fed Unveils Another Bailout Fund To Avoid Money Market Funds ‘Breaking The Buck’

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Via Zerohedge

The four-letter acronyms for ‘bailout’ continue to play out exactly like during the Lehman crisis (as we previewed here), as The Fed desperately tries to hold the backbone of the entire global financial markets together with whack-a-mole buying programs to avoid investors seeing behind the curtain of the whole Potemkin Village.

Earlier this week we previewed all this, noting that, in addition to the revival of the PDCF, we may also see the return of AMLF and MMIFF…

The second (MMIFF) was designed to provide liquidity for money market mutual funds, stimulating them to extend the term of their money market investments.

Instead of scrambling for overnight assets because of liquidity fears, this would help maintain demand for term securities in the money market. Although no loans were made under the MMIFF, the facility could be useful this time. While CPFF helps issuers of commercial paper, money market mutual funds are still in need of liquidity.

A related facility, which peaked at $140bn in 2008, was the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) which provided funding for depository institutions purchasing asset-backed commercial paper from money market mutual funds.

As if one needs reminding, one of the more dramatic events from the 2008 crisis was the sight of mutual funds trading below $1 – so-called ‘breaking the buck’.

When money-market investors fear they won’t get back their capital it will make a bad situation into a real crisis.

The Fed has enough to deal with without a run on mutual funds by retail investors, and so, sure enough, in addition to unlimited repo, CPFF, TALF, and PDCF, The Fed has just announced  the establishment of a Money Market Mutual Fund Liquidity Facility, or MMLF.

As the biggest buyers of commercial paper, this bailout facility is clearly aimed, once again, at being another effort to reduce the spiking risks (and freeze) in the critical short-term liquidity markets.

While yields did compress a little (positive) today, risk increased notably despite CPFF…

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And so, paging through the “OMFG, what do we do now that didn’t work in the past”-playbook, this new facility will  make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds.

We wait to see how effective this latest four-letter-word will be in calming the savage beast of a global dollar shortage.

*  *  *

Full Details below:

The Federal Reserve Board on Wednesday broadened its program of support for the flow of credit to households and businesses by taking steps to enhance the liquidity and functioning of crucial money markets.

Through the establishment of a Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds.

Money market funds are common investment tools for families, businesses, and a range of companies. The MMLF will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.

The term sheet below details the types of assets, including unsecured and secured commercial paper, agency securities, and Treasury securities, that are eligible, as well as additional information. The MMLF program will purchase a broader range of assets, but its structure is very similar to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or AMLF, that operated from late 2008 to early 2010. The MMLF is established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary. The Department of the Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the MMLF from the Treasury’s Exchange Stabilization Fund.

Term Sheet:

Money Market Mutual Fund Liquidity Facility

Facility: To provide liquidity to Money Market Mutual Funds (“Funds”), the Federal Reserve Bank of Boston
(“Reserve Bank”) would lend to eligible borrowers, taking as collateral certain types of assets purchased by
the borrower from Funds (i) concurrently with the borrowing; or (ii) on or after March 18, 2020, but before
the opening of the Facility.

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Borrower Eligibility: All U.S. depository institutions, U.S. bank holding companies (parent companies
incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of
foreign banks are eligible to borrow under the Facility.

Funds: A Fund must identify itself as a prime money market fund under item A.10 of Securities and Exchange
Commission Form N-MFP.

Advance Maturity: The maturity date of an advance will equal the maturity date of the eligible collateral
pledged to secure the advance made under this Facility except in no case will the maturity date of an advance
exceed 12 months.

Eligible Collateral: Collateral that is eligible for pledge under the Facility must be one of the following types:

1) U.S. Treasuries & Fully Guaranteed Agencies;

2) Securities issued by U.S. Government Sponsored Entities;

3) Asset-backed commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the
Fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies
or, if rated by only one major rating agency, is rated within the top rating category by that agency; or

4) Unsecured commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the
Fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies
or, if rated by only one major rating agency, is rated within the top rating category by that agency.

In addition, the facility may accept receivables from certain repurchase agreements.

Rate: Advances made under the Facility that are secured by U.S. Treasuries & Fully Guaranteed Agencies or
Securities issued by U.S. Government Sponsored Entities will be made at a rate equal to the primary credit
rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made.
All other advances will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is
offered to depository institutions at the time the advance is made plus 100 bps.

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Fees: There are no special fees associated with the Facility.

Collateral Valuation: The collateral valuation will either be amortized cost or fair value. For asset-backed
and unsecured commercial paper, the valuation will be amortized cost.

Credit Protection by Department of the Treasury: The Department of the Treasury, using the Exchange
Stabilization Fund, will provide $10 billion as credit protection to the Reserve Bank.

Non-Recourse: Advances made under the Facility are made without recourse to the Borrower, provided the
requirements of the Facility are met. For avoidance of doubt, borrowers under the MMLF will bear no credit
risk.

Regulatory Capital Treatment: Separately and consistent with the purposes of the MMLF, the Board, the
OCC, and FDIC will act to fully neutralize the impact of a depository institution holding company or depository
institution’s participation in the facility for purposes of regulatory capital requirements, including risk-based
capital and leverage requirements. The Board, OCC, and FDIC will fully exempt from risk-based capital and
leverage requirements (i) any asset pledged to the MMLF and (ii) any asset purchased from a Fund on or after
March 18, 2020 that the firm intends to pledge to the MMLF upon opening of the Facility.

Program Termination: No new credit extensions will be made after September 30, 2020, unless the Facility is
extended by the Board of Governors of the Federal Reserve System.

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So this better all be fixed by September?

The market for now was completely unimpressed by this latest effort:

 

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