Secured Commercial Paper Facility (UK)

As an extension of the CPF, the SCPF conducted purchases in both the primary and secondary markets. The Bank purchased SCP at a spread to the OIS rate and charged secondary market holders a fee, which was similar to the pricing mechanism of the CPF. Both the CPF and the SCPF were designed to assist companies that made material contributions to the UK economy, and both facilities restricted participation to commercial paper that was sterling denominated. As detailed below, the SCPF was established to purchase short term assets. In his authorization of asset purchases, the Chancellor of the Exchequer required that the Bank solely purchase assets for which there would be a viable demand once corporate credit markets recovered (Darling 2009). As a result, both the CPF and SCPF established credit rating requirements. For the SCPF, the Bank required that programs have a short term credit rating of A-1/P1/F1 or higher (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009). Split ratings with one rating lower than minimum disqualified the program, but ratings on negative watch did not (Mayer Brown 2009).

Though the two facilities were designed similarly, they were funded differently. The CPF was originally funded by Treasury bills issued by the Debt Management Office (DMO), but its funding source changed once the Bank began quantitative easing shortly after the facility opened. From that point until the facility was closed, all purchases were funded by the creation of new central bank money (Benford et al. 2009). The SCPF, in contrast, was only ever funded by Treasury bills issued by the DMO (Bank of England, “Asset Purchase Quarterly Report,” 2010-2011).

In extending the SCPF, the Bank solicited consultation and comments from the interested industry participants through a consultative paper put forth on June 8, 2009.

The CPF was part of an Asset Purchase Facility (APF) that had a ceiling initially set at £50 billion. However, for the CPF, rather than setting a specific timeline or target purchase amount, the Bank of England designed the facility to last for as long as the highly abnormal conditions persisted in corporate credit markets that were impairing finance of real economic activity (Bank of England, “Market Notice: Asset Purchase Facility,” 2009).

The CPF was part of an Asset Purchase Facility (APF) that had a ceiling initially set at £50 billion. However, for the CPF, rather than setting a specific timeline or target purchase amount, the Bank of England designed the facility to last for as long as the highly abnormal conditions persisted in corporate credit markets that were impairing finance of real economic activity (Bank of England, “Market Notice: Asset Purchase Facility,” 2009).

The Bank of England set up the SCPF specifically to purchase SCP that “assist[ed] in the provision of credit to support economic activity in the UK.” The Bank determined whether a program supported economic activity in the UK by examining its underlying assets. While the SCP had to be sterling denominated, there was no currency restriction on the underlying assets (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).

The Bank gave the following examples of assets that would likely meet its requirements: trade receivables, equipment leases, credit card receivables, and short term loans to consumers (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).

As discussed earlier, the Bank discounted purchases in the primary market based on the OIS curve. It published the discount rate online daily. When the SCPF opened, the Bank offered to purchase SCP at a 100 bp spread to the OIS rate at issue from dealers. For purchases from counterparties on the secondary market, the Bank purchased assets at the lower of the price determined by this method or the amortized cost from issue price. Secondary counterparties, unlike primary issuers, were charged a 25 bp fee (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).

This pricing structure was similar to that of the CPF, which purchased commercial paper “at spreads that were significantly below those in the market at the time, but which were significantly above those expected to prevail in normal conditions” (Fisher 2010). It also aligned with the Bank’s stated intention of maintaining the SCPF only as long as “the highly abnormal conditions in corporate credit markets persist and materially impair the financing of real economic activity” (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009). Establishing prices that were attractive during the credit crunch but that would become less appealing as liquidity was restored was consistent with the explicitly stated purpose of the SCPF to establish the Bank as a “backstop purchaser” (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).

The SCPF sought to purchase SCP backed by assets that provided short term credit to companies and consumers in the UK. On the other hand, the Bank was concerned not to encourage the sort of risk-taking from extreme maturity transformation, which had caused so many problems leading up to the crisis. Therefore, a restriction was put in place on the degree of maturity mismatch between the underlying assets and the securities they backed (Fisher 2010). A program was considered eligible for the SCPF only if the weighted average life of its underlying assets was less than nine months, and no single underlying asset could have an expected final maturity of over a year and a half (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).

Additionally, eligible SCP must have been issued through Crest, Euroclear, or Clearstream; it could not have nonstandard features such as extendible maturity or subordination; and the Bank ensured appropriate diversification of asset pools (Mayer Brown 2009). However, any announcement on specific diversity requirements have not been found.

Consistent with its stated purpose, the Bank imposed limits on purchases under the SCPF based on the proportion of a program’s underlying assets that provided credit to borrowers making a material contribution to the UK economy (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009). In its proposal for extending the APF to purchase SCP, the Bank gave the following example: “if 80% of the assets met the criterion, up to 80% of the securities issued by the programme would be eligible for purchase” (Bank of England, “Asset Purchase Facility: Consultation on Proposals for Working Capital Facilities,” 2009). This provision differed from the US asset purchase program, which required that issuers be US entities or subsidiaries of US entities but did not establish rules regarding underlying assets or the degree to which those underlying assets contributed to the US credit market (Mayer Brown, “Bank of England Announces UK Secured Commercial Paper Facility,” 2009). 

This provision was the only restriction placed on the amount the Bank would buy under the SCPF. This reflected the Bank’s desire to act as a backstop purchaser, or market maker of last resort, until liquidity returned to SCP markets (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009). The decision not to set a limit for the amount of purchases through the SCPF was also consistent with the Bank’s overall strategy concerning asset purchases, which “was not to purchase a specific quantity of assets, but rather to improve the functioning of those markets. In that respect, the knowledge that the Bank stands ready to purchase assets may be as beneficial as actual purchases” (Dale 2010).

Sponsors of programs that wanted to sell SCP had to apply to the Bank in order to be deemed eligible for the SCPF. In assessing eligibility, the Bank carefully examined a program’s underlying assets. Once a program was accepted for participation in the SCPF, the Bank offered to purchase individual securities of at least £1 million. Program sponsors were required to provide the Bank with regular updates on the program’s assets, and sponsors could not add new asset pools into the program vehicle without first contacting the Bank (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).

The Bank acknowledged that, given the strict eligibility requirements, it could take some time to establish programs that could participate in the SCPF. As a result, the Bank announced that it would wait to give the required 12-month notice of termination of the SCPF until at least the third month after the facility opened. Ultimately, the SCPF did not close until 2016 (Bank of England, “Market Notice: Asset Purchase Facility—Secured Commercial Paper Facility,” 2009).