Following the initial outbreak of COVID-19 and the ensuing economic turmoil that immediately followed, the BDA has led the broker-dealer response from advocating for muni relief in multiple stimulus packages, to helping shape the muni and corporate liquidity facilities currently being developed at the Federal Reserve.
Below is an Outline of Actions Taken by the Federal government and Steps taken by the BDA to Support the Municipal Market
Congressional Response: The CARES Act
Following passage of two smaller stimulus measures, Congress quickly ramped up for a $2+ trillion dollar package that would include assistance for the municipal market.
After extensive market-wide advocacy effort, including direct grassroots advocacy from BDA membership, the CARES Act was passed which provides:
Authority for the Fed to Provide up to $454,000,000 available to make loans, loan guarantees, and other investments in support of programs or facilities including:
- Purchasing obligations or other interests directly from issuers of such obligations or other interests; or
- Purchasing obligations or other interests in secondary markets or otherwise; an
- Making loans, including loans or other advances secured by collateral.
Federal Reserve Facilities
On March 18, 2020, before the enactment of the CARES Act, the Fed announced the creation of the several market support programs as their initial effort to address illiquidity in the markets. These facilities include:
- Primary Dealer Credit Facility (PDCF): Provides Discount Window-like collateralized inventory financing for Primary Dealers.
- Money Market Mutual Fund Liquidity Facility (MMMFLF): Provides portfolio financing for money market securities purchased by banks from money market mutual funds.
- Commercial Paper Funding Facility (CPFF): The Fed will buy new-issue CP directly from eligible issuers.
- Primary Market Corporate Credit Facility (PMCCF): The Fed will buy new-issue IG and certain fallen angel HY bonds with maturities out to four years directly from issuers.
- Secondary Market Corporate Credit Facility (SMCCF): The Fed will buy IG and certain fallen angel HY corporate bonds with up to four years left to maturity and corporate bond ETF shares. Blackrock is the portfolio manager and State Street the custodian for this program.
After weeks of building the Corporate Facility, it is widely expected that the Fed will open both the primary and secondary market facilities this week.
With the enactment of the CARES Act, the Fed created an additional program:
- Municipal Liquidity Facility (MLF): The Fed will purchase Tax, Revenue, and Bond Anticipation Notes with Maturities up to three years directly from state and local issuers.
BDA Advocacy in Response to Fed Actions
BDA has been active in advocating for expanding and refining the terms and focus of the Fed’s extraordinary facilities, including advocating for the expansion and refinement of several Fed programs.
The Fed has announced several enhancements to its extraordinary liquidity programs that are consistent with BDA’s requests.
For the money market-related programs, the Fed:
- Expanded the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit; and
- Expanded the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities.
Municipal Liquidity Facility (MLF)
The Fed continues to take steps to operationalize Municipal Liquidity Facility (MLF). Last week, following BDA comments, the Fed announced an expansion of scope and duration including:
- Expansion to U.S. counties with a population of at least 500,000 residents, and U.S. cities with a population of at least 250,000 residents;
- Participation in the facility by certain multistate entities;
- To be eligible for the facility, notes must mature no later than 36 months from the date of issuance—an increase from the previously announced 24-month maximum term; and
- The termination date for the facility has been extended to December 31, 2020 in order to provide eligible issuers more time and flexibility.
This news follows the announcement that MSRB Market Structure Officer John Bagley will join the Fed temporarily to help with implementation and coordination of the MLF.
Purchases are expected to begin by mid-may.
Secondary Market Corporate Credit Facility (SMCCF)
While supporting the Secondary Facility, the BDA called on the Fed to operate with the following principles in mind:
- Diversity of Participants
- Transparency in Operations
- Anonymous, All-to-All Trading
- Fairness of the Facility
In addition, BDA has urged the expansion of the PDCF to Include non-Primary Dealers of municipal securities.
Next Steps: Stimulus 4
Following passage of the CARES Act in late March, and “Stimulus 3.5” mid-April, Congress began discussions of a “stimulus 4” that would likely include a large assistance package for state and local governments, especially in the House.
The House package will likely include:
- Between $500 billion to $1 trillion in state and local aid;
- A new Build America Bonds program;
- An expansion of the usage of PABs.
The BDA continues to advocate for priorities such as the reinstatement of advance refundings and raising the limit of BQ Debt, in any additional stimulus package, but at this time, passage of any “stimulus 4” is in question.
