Commercial Paper

Commercial Paper refers to unsecured short-term loans.  Maturities ranging from overnight to up to 270 days are exempt from Securities and Exchange Commission registration requirements.

The primary issuers of Commercial Paper are corporations that lend to money market mutual funds and other companies or institutions who need working capital to fund ongoing operations. The paper typically carries interest rates higher than risk-free Treasury bills, but lower than bank rates for short-term loans.

The credit crisis has had an effect on Commercial Paper interest rates and caused the Federal Reserve to get involved. Commercial Paper maturities had averaged about 30 days before the credit crisis intensified, but as investors panicked and started pulling money out of the money market investments, many companies experienced trouble selling commercial paper and demand dried up for 30-day paper. The effect was a rise in interest rates across the board.  At that point, the Federal Reserve stepped in and announced the creation of the Commercial Paper Funding Facility (CPFF) to help provide liquidity to term funding markets.

Essentially it means, that in order to prevent further disruptions in the financial markets, the Fed made a special deposit at the Federal Reserve Bank of New York to be used for purchasing 3-month unsecured and asset-backed commercial paper directly from corporations.

Following that announcement, interest rates on U.S. commercial paper fell close to the lowest in four years as the Federal Reserve absorbed more than 9 percent of the market. Expect the rates to continue changing frequently until markets regain some stability.