Funding Agreement Backed Commercial Paper

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In the second half of the 2000s, U.S. life insurers accelerated their issuance of XFABN, which is presented as a blue line in Figure 4. And as with other short-term funding markets, such as the asset-backed and repo-backed commercial paper markets, XFABN`s market began to collapse in the summer of 2007, when institutional investors suddenly stopped extending their XFABN. In accordance with the terms of the contract, investors received, after the declaration of resignation, new securities, called spinoffs, presented by the dotted red line in Figure 4 – maturing on a fixed date, usually about a year after the notification of the resignation. 1. Another advantage is that financing agreements do not increase the standard leverage measures of insurers, since they are statutory insurance contracts. Back to text Financing products can be offered worldwide and by many types of issuers. They usually do not require registration and often have a higher return than MONEY MARKET funds. Some products may be linked to selling options that allow an investor to terminate the contract after a certain period of time. As might be expected, financing arrangements are the most popular among those who wish to use the products for capital maintenance and not for growth in an investment portfolio. 3. The XFABN and FABCP programs are similar to bank-funded asset-backed commercial paper (ABCP) programs, with full liquidity guarantees from the sponsoring bank. In these programs, securities can be reimbursed to the sponsoring insurer on deployment dates (in the case of FABCP) or within a few months, usually less than 397 days (in the case of XFABN).

Back to text Conclusion This EFA project provides FABS data on a daily basis and more detailed than indicated in the financial accounts. This additional detail about FABS can be used to better understand several important financial relationships in the U.S. economy. First, safety-type data show that there was a race on XFABN in the third quarter of 2007, difficult to detect in more aggregated data. Second, the daily frequency of FABS data helps determine the timing of short-term market disruptions, such as in 2007, and improves our understanding of the pressure on funding during the recent financial crisis and in the future. Finally, FABS data provide information on substitution within asset classes: for example, when FABS funding dried up during the financial crisis, life insurers turned to both shorter-term fabS and the FHLB system to reduce liquidity reductions. In the future, the availability of daily data on the different types of FABS will allow for continuous monitoring of this important funding market that seems to be recovering.. . .

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