CP Facility Contemplated for Mutual Fund Loans

A large bank has filed an exemptive application to allow borrowing by mutual funds from an unaffiliated commercial paper facility administered by the bank. The CP facility would issue commercial paper and use the proceeds in part to make short-term loans to mutual funds, presumably for liquidity purposes. Large banks would provide credit enhancement. The CP facility would offer lower rates than traditional bank lending. The exemptive application is necessary because the 1940 only permits borrowing from banks.

OUR TAKE: Demand for lending facilities for mutual funds increased dramatically during the credit crisis. A new, lower-cost (and readily available) financing option would help the industry.

http://www.sec.gov/rules/ic/2009/ic-29066.pdf