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Secondary Market Corporate Credit Facility (SMCCF)

Contents

  1. Unraveling the SMCCF: A Comprehensive Overview
  2. Introduction to the SMCCF:
  3. Evolution of the SMCCF:
  4. Insights into the SMCCF's Operations:

Demystifying the Secondary Market Corporate Credit Facility (SMCCF)

Understanding the Role, Mechanics, and Impact of the SMCCF in the Corporate Bond Market

Unraveling the SMCCF: A Comprehensive Overview

Introduction to the SMCCF:

The Secondary Market Corporate Credit Facility (SMCCF) emerged as a pivotal intervention by the Federal Reserve amidst the COVID-19 crisis to bolster the corporate bond market. Launched on March 23, 2020, this special purpose vehicle (SPV) aimed to instill confidence in banks by creating a robust secondary market for corporate debt, facilitating increased lending to corporations.

Evolution of the SMCCF:

  1. Expansion of Purchases: Initially focusing on U.S. investment-grade corporate bonds and bond ETFs, the SMCCF expanded its scope on April 9, 2020, to include the purchase of bonds with lower credit quality.

  2. Diversification Initiatives: On May 12, 2020, the SMCCF commenced purchasing bond ETFs, followed by individual bonds on June 16, 2020, thereby broadening its portfolio to create a diversified market index.

  3. Ceasing Operations: Despite its significant impact, the SMCCF ceased buying bonds or ETFs after December 31, 2020, following the decision by Treasury Secretary Steven Mnuchin not to reauthorize its extension.

Insights into the SMCCF's Operations:

  1. Structural Framework: The SMCCF operated as an SPV with an initial investment of $25 billion from the U.S. Department of the Treasury, using corporate bonds as collateral for loans from the Federal Reserve Bank of New York (FRBNY).

  2. Eligibility Criteria: Eligible bonds had to meet specific criteria, including being issued by U.S. businesses with material operations in the U.S., maintaining certain credit ratings, and adhering to conflict of interest requirements.

  3. Investment Guidelines: The SMCCF imposed restrictions on the concentration of holdings, avoiding excessive ownership of bonds issued by a single corporation or ETFs' assets.

  4. Fair Market Practices: Purchases by the SMCCF were made at fair market value, with a cautious approach to ETFs' prices relative to their net asset values.