Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper range from 1 to 270 days. [1]. Commercial paper is the largest component of the U.S. money market. and is a common investment vehicle found in U.S. money market funds. Commercial paper is not unique to the U.S. market, as it is issued in many national money markets. Similar to Treasury bills. commercial paper is usually issued at a discount and is redeemed at face (par) value. The difference between these two values constitutes the interest earned by the investor.

Contents

History

In the U.S. commercial paper markets began in the nineteenth century, with non-financial firms such as textile mills and railroads issuing short term paper. [2] In 1919 the founding of General Motors Acceptance Corporation (GMAC) extended the commercial paper market to financial firms. [2] The growth of consumer financing (autos and durable consumer goods sold with credit issued by finance companies) further expanded financial firm commercial paper. [2] Demand for commercial paper grew with the creation of the money market mutual fund in the 1970s. Innovations in the 1980’s included the growing dominance of dealer sold commercial paper (over direct company issuance) and the creation of Asset-Backed Commercial Paper Conduits (ABCP). [2]

In 1970, the collapse of Penn Central, a transportation company, led to the company defaulting on its commercial paper. Loss of investor confidence following this default resulted in investors refusing to refinance maturing commercial paper. Aggressive lending by the Federal Reserve provided liquidity and stabilized the market. [3]

In 2007 defaults in Bear Stearns hedge funds and term extensions in the ABCP market created a sequence of institutional runs on ABCP paper. [3] [4] The 2008 default of Lehman Brothers’ commercial paper resulted in a money market fund, The Reserve Fund, breaking the buck, with losses culminating in a 97 cent per share value, and a shutting off of redemption. The loss of liquidity resulted in a massive institutional run on money market funds, a sharp spike in commercial paper rates, and a growing lack of liquidity in the market. [2] To preclude additional runs and bring back liquid markets, the Federal Reserve instituted multiple funding facilities to the commercial paper market and money market funds. [5] These programs expired in 2009 and 2010.

Market structure

Commercial paper is loosely defined by issuer: [2]

• Non-financial firm commercial paper;
• Financial firm commercial paper;
• Asset-backed commercial paper.

The following charts show the amount of commercial paper outstanding over the years 2000-2012. Figure 1. provides data for the entire commercial paper market. Figures 2. through 4. provide data from each issuer.

Commercial paper outstanding 2000-2012