OREANDA-NEWS. The number of collateralized commercial paper programs (CCP) and total CCP outstanding peaked in February 2014, according to a report issued by Fitch Ratings. Since then, CCP outstanding has fallen by 43%, despite the seeming attractiveness of the product for banks looking to diversify funding and money market funds attracted new sources of investment supply. The report discusses the instrument's structure and uses from the perspective of banks as issuers and money funds as investors.

In the CCP structure, financing facilities are collateralized through a special purpose vehicle (SPV). Debt is issued to investors in the form of CCP with terms that range from 1 to 397 days. CCP is typically either guaranteed by a bank and carries the bank's short-term rating or is issued by a rated subsidiary of the bank and carries the subsidiary's short-term rating. The SPV enters into repurchase agreements (repo) with the bank's broker dealer subsidiary. Investors in CCP notes provide the funding for the repo and the repo assets in turn are used as collateral for the CCP, creating a secured instrument. The purchased assets can be traditional government securities or non-traditional assets such as equities, corporate bonds and convertibles.

Money fund investment in CCP provides banks with the opportunity to finance greater amounts of repo assets for terms greater than seven days than would be possible under traditional term repo arrangements. The SEC's Rule 2a7 deems repos maturing in more than seven days as illiquid holdings, a category which is restricted to 5% of a fund's portfolio. However, CCP is deemed liquid under Rule 2a7 and therefore not subject to the 5% restriction.

In addition to lengthening repo terms, the CCP structure may permit banks to broaden the potential base of investors, conserve existing capacity or offset reduced capacity in the traditional repo market or other short-term markets, and potentially allows the bank to offer more customized terms.