US CP
The United States Commercial Paper
Definition
USCP, The United States Commercial Paper
The United States Commercial Paper is an unsecured promissory note issued by large corporations to obtain funds and meet short-term debt obligations.
A United States Commercial Paper (USCP) is a short-term debt instrument issued by companies to raise funds generally for a time period of under 270 days with the average being 30 days. The reason for this is because US CP is exempt from SEC registration if its maturity does not exceed 270 days.
USCPs are not backed by any collateral so only firms with excellent credit ratings from a recognized credit rating agency are able to issue USCPs.
- Maturity: from 1 day to 270 days
- Currencies: USD
- Nominal amount: at least 100 000 USD (or the equivalent in foreign currency)
- Rate: he CP may be issued at a discount to their face value or may bear fixed or floating rate interest;
Presentation of the actors
All of them enjoy market stability, liquidity and competitive financing terms.
Issuers
US CPs are issued by a wide variety of domestic and foreign firms, including financial companies, banks, and industrial firms. They issue paper to obtain funds for their short-term cash requirements.
Dealers/Brokers
Dealers are the intermediaries between issuers and investors. They are often banks that market and sell the paper on behalf of issuers. They have an option of buying the paper to resell it later, or simply keeping it. The dealers are compensated with a fee based on the amount of CP outstanding.
Investors
Investors (asset managers, banks, non-financial companies, etc.) buy paper as a form of short term investment.
Issuing and Paying agent
At the start of the program, the issuer needs to appoint an IPA. The IPA collects trade details from the issuer, the dealer and the investor, and then obtains the International Securities Identification Number (ISIN) codes before finally arranging payment. ISIN codes are allocated to each trade in the NEU CP market. Each is unique to a particular trade and assists with identification during clearing and settlement.
Ratings agencies
In the United States, Commercial Paper is rated by nationally recognized statistical rating organizations (NRSRO). They issue credit ratings on US CP. The SEC permits these ratings to be used by other financial firms and investors for certain regulatory purposes. For example, under SEC rules, money market funds may invest only in CP that have been rated in the top two categories of creditworthiness by an NRSRO. if the security is rated by two or more NRSROs, it must carry one of the two highest ratings from at least two NRSROs. There are currently 10 SEC-approved NRSROs on the USCP market: Standard & Poor's Moody's Investors Service Morningstar, Inc. Fitch Ratings A.M. Best Kroll Bond Rating Agency Dominion Bond Rating Service, Ltd Japan Credit Rating Agency, Ltd. Egan-Jones Rating Company HR Ratings de México, S.A. de C.V.
Guarantors
US CP can be guaranteed by an organization with excellent credit, such as a Bank. In such cases, a letter of credit is typically used for this purpose (such CP is referred to as “letter of credit CP”). The letter of credit is an unconditional obligation of the issuing bank to pay out of its own funds maturing CP, in exchange for a fee which is a certain percentage of the amount of CP issued.
Clearers
The Depository Trust & Clearing Corporation or DTCC is the US CP clearer. Most US CP transactions are settled in a book‐entry form through DTCC’s Money Market Instrument (“MMI”) program and most US CP are identified by an ISIN number. DTCC provides dealers with a record of the transactions and dealers provide investors with trade confirmations. Secondary market trades also are settled in book‐entry form through the facilities of DTC.
Regulator
US CPs are governed by New York law. A foreign issuer, even when a governmental entity, must agree to accept the jurisdiction of US courts (The Federal Courts located in New York City) over any legal matters regarding the program.
