About Commercial Paper
Commercial paper (CP) consists of short-term, promissory notes issued primarily by corporations. Maturities range up to 270 days but average about 30 days. Many companies use CP to raise cash needed for current transactions, and many find it to be a lower-cost alternative to bank loans.
The Federal Reserve Board disseminates information on CP primarily through its World Wide Web site. In addition, the Board publishes one-, two-, and three-month rates on AA nonfinancial and AA financial CP weekly in its H.15 Statistical Release.
The Federal Reserve Board's CP release is derived from data supplied by The Depository Trust & Clearing Corporation (DTCC), a national clearinghouse for the settlement of securities trades and a custodian for securities. DTCC performs these functions for almost all activity in the domestic CP market. The Federal Reserve Board only considers maturities of 270 days or less. CP is exempt from SEC registration if its maturity does not exceed 270 days.
Data on CP issuance rates and volumes typically are updated daily and typically posted with a one-day lag. Data on CP outstanding usually are available as of the close of business each Wednesday and as of the last business day of the month; these data are also posted with a one-day lag. The daily CP release will usually be available at 9:45 a.m. EST. However, the Federal Reserve Board makes no guarantee regarding the timing of the daily CP release. This policy is subject to change at any time without notice.
To calculate CP interest rate indexes, the Federal Reserve Board uses DTCC's data for certain trades to estimate a relation between interest rates on the traded securities and their maturities. In this calculation, the trades represent sales of CP by dealers or direct issuers to investors (that is, the offer side) and are weighted according to the face value of the CP so that larger trades have a greater effect on the resulting index. With the relation between interest rates and maturities established, the reported interest rates represent the estimated interest rates for the specified maturities.
Interest rates calculated through the process described above are a statistical aggregation of numerous data reflecting many trades for different issuers, maturities, and so forth. Accordingly, the reported interest rates purport to reflect activity in certain segments of the market, but they may not equal interest rates for any specific trade. As with other statistical processes, this one is designed to minimize the difference between the interest rates at which actual trades occur and the estimated interest rates.
CP trades included in the calculation are chosen according to the specifications listed in the table below. Data to assess CP trades relative to these criteria are updated daily from numerous publicly available sources. Standard Industrial Classification (SIC) code classifications are taken from the Securities and Exchange Commission (SEC) Directory of Companies Required to File Annual Reports with the SEC. When an issuer's primary SIC code is not reported in the SEC directory, the primary SIC code reported in the issuer's financial reports is used; otherwise, SIC codes are determined upon consultation with the Office of Management and Budget's Standard Industrial Classification Manual or its Supplement.
For a discussion of econometric techniques for fitting the term structure of interest rates, including bibliographic information, see, for example, William S. Cleveland, 1979, "Robust Locally Weighted Regression and Smoothing Scatterplots," Journal of the American Statistical Association, 74, 829-36, or William S. Cleveland, Susan J. Devlin, and Eric Grosse, 1988, "Regression by Local Fitting," Journal of Econometrics, 37, 87-114.
Criteria for Calculation CP Interest Rate Indexes
|Item||AA nonfinancial||A2/P2 nonfinancial||AA financial||AA asset-backed|
|Short-term credit rating||Programs with at least one "1" or "1+" rating, but no ratings other than "1"||Programs with at least one "2" rating, but no ratings other than "2"||same as AA nonfinancial||same as AA nonfinancial|
|Long-term credit rating||Programs with at least one "AA" rating, including split-rated issuers||Programs with at least one "A" or "BBB"/"Baa" rating, including split-rated issuers; but none with any ratings outside the "A" - "BBB"/"Baa" range||same as AA nonfinancial||Not applicable|
|Industries included (primate SIC codes)||0100 - 5999, 7000 - 9999||same as AA nonfinancial||6000 - 6999, excluding 6189* (asset-backed CP) and 6200 - 6299 (security brokers/dealers)||6189*|
Criteria Considered for All CP Interest Rate Indexes
|Credit rating agencies considered||Moody's Investors Service and Standard & Poor's*|
|Credit rating reviews||Programs that would be included in an index calculation are excluded when (1) the issuer's credit ratings are under review and (2) a one-notch upgrade or downgrade would violate either credit rating criterion|
|SEC registration types||Both traditional programs (3(a)3) and private placements (4(2)) are included|
|Placement||Both dealer-placed and directly placed programs are included|
|Excluded trades||Foreign programs; Municipal programs; secondary, repurchase agreement/financing, and interest-at-maturity trades|
|Weights||Trades are weighted by their face values|
- November 5, 2008: Clarification of Criteria Considered for Commercial Paper Rates
- June 18, 2007: Change to Credit Rating Agencies Considered
- May 12, 1997: Change in the Source of Commercial Paper Data
To calculate CP outstanding levels, the Federal Reserve Board uses DTCC's weekly and monthly CP outstandings data. CP outstanding levels are aggregates of all individual CP outstandings. The individual CP outstandings included in the calculation of the various levels are chosen according to data from numerous publicly available sources.
Seasonally adjusted outstanding levels are calculated using the Bell Labs seasonal adjustment method. For more information on the Bell Labs seasonal adjustment method see Cleveland, Devlin, and Terpenning, "The SABL Seasonal and Calendar Adjustment Procedures," Time Series Analysis: Theory and Practice 1.
SEC Rule 2a-7 (tier levels)
Rule 2a-7 of the Investment Company Act of 1940 limits the credit risk that money market mutual funds may bear by restricting their investments to "eligible" securities. An eligible security must carry one of the two highest ratings ("1" or "2") for short-term obligations from one of the nationally recognized statistical ratings organizations (NRSROs), and, if the security is rated by two or more NRSROs, it must carry one of the two highest ratings from at least two NRSROs. A tier-1 security is an eligible security rated "1" by an NRSRO, and, if the security is rated by two or more NRSROs, it must be rated "1" by at least two of the NRSROs; a tier-2 security is an eligible security that is not a tier-1 security. The sum of tier-1 and tier-2 securities will not add up to the total due to ineligible securities.
CP issues that would be in a given tier are excluded when (1) the issuer's credit ratings are under review and (2) a one-notch upgrade or downgrade would result in the issue no longer meeting the tier level credit rating requirement. Similarly, CP issues that would not be in given tier are included when (1) the issuer's credit ratings are under review and (2) a one-notch upgrade or downgrade would result in the issue meeting the tier level credit rating requirement.
Money funds generally may hold no more than five percent of their assets in the tier-1 securities of any individual issuer and no more than one-half of one percent of their assets in the tier-2 securities of any individual issuer; moreover, a money fund's holdings of tier-2 securities may constitute no more than three percent of the fund's assets.
Major Change to Outstanding Calculations (April 10, 2006)
On April 10, 2006, the Federal Reserve Board made major changes to its CP outstanding calculations. New outstanding categories were added, some existing category definitions were modified, and current and historical CP issuer information was updated.
The historical data for the new outstanding structure contains data for January 2001 through the most recently completed month. The historical data for the old outstanding structure contains data for January 1991 through March 2006. The historical data for both structures are available through the Federal Reserve Board's Data Download Program (DDP). Please be aware that similarly named categories from both outstanding structures should not be viewed as equivalent.
The following changes were made to the CP outstanding structure:
- Total outstanding is the sum of nonfinancial, financial, asset-backed, and other (unknown) outstandings. Prior to April 10, asset-backed was considered to be a subcategory of financial and other (unknown) was not included in total outstanding. Other (unknown) is defined as outstanding CP issuers for which no SIC code could be determined.
- Nonfinancial outstanding is the sum of domestic, foreign, and other (unknown) nonfinancial outstanding. Other (unknown) nonfinancial outstanding is defined as nonfinancial outstanding CP by issuers for which no domicile could be determined.
- Financial outstanding is the sum of domestic, foreign, and other (unknown) financial outstanding. Other (unknown) financial outstanding is defined as financial outstanding CP by issuers for which no domicile could be determined.
- Asset-backed outstanding is no longer a subcategory of financial outstanding. Financial outstanding and all its subcategories no longer include asset-backed outstanding.
- Financial domestic outstanding is the sum of U.S owned, foreign bank parent, foreign nonbank parent, and other (unknown) financial domestic outstandings. Other (unknown) financial domestic outstanding is defined as financial domestic outstanding by issuers for which ownership could not be determined.
- Outstandings are calculated from issuance with maturity of 270 days or less.
The following table shows the current structure of CP outstanding:
|U.S. owned||Foreign bank parent||Foreign nonbank parent||Other||Bank||Other|
Revisions to outstandings, based on updated issuer information, are made on a continuous basis without any notification. When revisions are sufficiently large, an announcement will be posted to the Announcements page of the CP release.