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A Change in the Source of Commercial Paper Data Published by
the Federal Reserve System
On September 2, 1997, the Federal Reserve Board will begin calculating its
statistics on commercial paper (CP) from data transmitted electronically to
the Federal Reserve Board from The Depository Trust Company (DTC) of New
York City. The preceding Friday, August 29, 1997, will mark the as-of date
for the last releases of data on CP market activity collected on forms FR
2957a, b, and d at the Federal Reserve Bank of New York through mail and
telephone surveys of market participants.
The first release of CP data based on the DTC transmission will be
interest rate data for September 2, 1997, released through the Federal
Reserve Board's World Wide Web site on September 3, 1997, and published
subsequently in the Board's H.15 statistical release of September 8, 1997.
For as-of dates after August 29, the other type of CP data released by the
Federal Reserve, the value of paper outstanding, will be released only on
the Board's World Wide Web site and will no longer be collected or released
by the Federal Reserve Bank of New York. The Board's Web address is
http://www.bog.frb.fed.us/
The change in source will produce data on the outstandings of various
CP classifications that are more reliably accurate than the current data,
but use of the DTC data will not affect the continuity of the published
information on CP outstanding. The change in source will, however,
generate interest rate information sufficiently different from the current
data that their release will represent a break in the current interest rate
series rather than a continuation of them.
The Federal Reserve uses data on CP outstanding to track sources and
uses of external corporate funding, measure the aggregate flow of funds,
and determine the composition of short-term financing in credit markets.
With information on CP interest rates, the Federal Reserve monitors
short-term financial markets and gauges the current cost of funds to
businesses. Relationships between CP interest rates and those on Treasury
bills shed light on investor perceptions about the risk in short-term
business lending, and they may give an early indication of concerns among
market participants.
Background
The Depository Trust Company is a national clearinghouse for the settlement
of securities trades and a custodian for settled securities. DTC performs
these functions for nearly all domestic CP market activity. Because DTC
generates the data through the normal course of business, they are
definitively accurate and eliminate the need to impose a reporting burden
on other market participants. The electronic receipt of data each day at
the Federal Reserve Board will save the Federal Reserve System $78,700 per
year in expenses devoted to the FR 2957 surveys and will eliminate the
1,640 hours per year expended by market participants in responding to the
surveys.
The use of DTC data will improve the accuracy of the CP interest rate
data as well as improve the reliability of the information on outstandings.
The current method of collecting interest rate data, telephone surveying,
requires respondents to exercise some judgment when giving answers.
Indeed, many market participants believe that this subjectivity has allowed
the interest rate series collected through the FR 2957d to significantly
overstate the rates at which actual trades occur. Such inaccuracy would
greatly reduce the value of the data, both to the Federal Reserve and to
market participants.
The switch to DTC's data will improve the timeliness as well as the
reliability of the published outstandings data. The outstandings data will
become available within one or two days instead of the one to three weeks
the Federal Reserve requires to process the weekly and month-end survey
data received at the Federal Reserve Bank of New York. Under the new
system, in contrast, data will be downloaded at the Federal Reserve Board
directly from DTC as early as 6:30 p.m. on a given as-of date, and the
entire process of obtaining and processing the data for both interest rates
and outstandings will require only about twenty minutes.
Regarding the reliability of classifications of outstandings, each
survey respondent classifies its own programs, and there have been
inconsistencies and errors in these classifications. For example, sizable
revisions to the data became necessary in early 1994, when some respondents
had categorized domestic CP programs as "foreign," and in 1996, when
misclassifications led to a major restatement of asset-backed CP
outstandings. With the DTC data, the Federal Reserve will maintain one
master list of program classifications, thereby greatly reducing the risk
of misclassification.
The Collection and Publication of Information
The Federal Reserve Bank of New York collects the weekly data on
outstandings from 16 CP dealers and 43 firms that sell CP directly to
investors on forms FR 2957a and b. The New York Bank also collects,
seasonally adjusts, and releases month-end data on CP outstanding from the
same respondents, and the information is subsequently published each month
in the Federal Reserve Bulletin. The New York Bank collects offering
interest rates daily by telephone on form FR 2957d from five CP dealers and
seven direct issuers of CP. The averages of these responses are the
composite rate indexes the New York Bank releases daily without lag, and
that the Federal Reserve Board publishes in its weekly H.15 and monthly
G.13 statistical releases. Some of the composite rate indexes are also
published in the Federal Reserve Bulletin.
By agreement between the Board and DTC, the Board will release only
aggregated data on CP interest rates and outstandings. The Board has
categorized each CP program that DTC settles according to the categories
denoted on the FR 2957a so that outstandings data released under the new
system will be consistent with the current published series on CP
outstanding. The share of the Federal Reserve's reported CP outstanding
that has been on deposit at DTC has been growing consistently and stood at
more than 99 percent in March 1997. Thus, DTC's data on outstandings are a
near-prefect substitute for the FR 2957 sample.
The Federal Reserve will continue to release interest rates for both
financial and nonfinancial CP at various maturities, but continuity in the
published series is unlikely. The specifications for nonfinancial series
are essentially unchanged, but the widely held view that the current series
overstates actual market rates suggests that the level of the interest rate
series derived from DTC's data will be somewhat lower than if the series
were continued unchanged.
The published series on financial CP interest rates will also change
substantially, largely as a result of a new, more precise specification.
These changes, described below, should make the reported index a more
useful measure of interest rates for a specific segment of the CP market.
The data on CP outstanding will be available to the public more
quickly than before, but interest rate data--available now on a same-day
basis--will be available with a one-day lag under the new system. The lag
arises because DTC's data are transmitted to the Board after the conclusion
of the settlement process at the end of the business day.
The interest rate series will continue to appear in the publications
now carrying them, but the titles and footnotes associated with the series
on the H.15 and G.13 releases will change to reflect the substantive
changes to the nature of the series. The releases will report interest
rates for one-, two-, and three-month maturities, instead of rates for the
one-, three-, and six-month maturities currently reported. Interest rate
data will also be available through the Federal Reserve Board's World Wide
Web site: http://www.bog.frb.fed.us/
In addition to the rates collected by the New York Reserve Bank
through the FR 2957d, the Board has collected weekly (Wednesday) offer-side
rates for thirty-day CP with A2/P2 ratings from a sampling of CP dealers
and released them in the form of a spread over higher-rated CP. Under the
new system, the Board will also prepare an A2/P2 nonfinancial interest
rate, at the thirty-day maturity, and release it only through the Board's
Web site.
Method for Calculating the Interest Rate Series with DTC's Data
The Federal Reserve Board will use DTC's data to estimate a relation
between interest rates on certain securities and their maturities and will
weight CP traded according to the face value of the paper so that larger
trades will have a greater effect on the resulting index. /1 With the
relation between interest rates and maturities established, the reported
interest rates represent the estimated interest rates for the specified
maturities. Thus, like the constant- maturity yields computed by the
Department of the Treasury, this method allows the interpolation of
interest rates for given maturities even when no paper was sold at those
maturities.
1. For a discussion of econometric techniques for fitting the term
structure of interest rates, including bibliographic information, see, for
example, Mark Fisher, Douglas Nychka, and David Zervos, "Fitting the Term
Structure of Interest Rates with Smoothing Splines," Finance and Economics
Discussion Series 95-1 (Board of Governors of the Federal Reserve System,
January 1995).
Criteria for Calculating CP Interest Rate Indexes
| Item | AA financial |
AA nonfinancial |
A2/P2 nonfinancial |
|---|---|---|---|
| Short-term credit rating | Programs with at least one "1" or "1+" rating but no ratings other than "1" | same as AA financial | Programs with at least one "2" rating but no ratings other than "2" |
| Long-term credit rating | Programs with at least one "AA" rating, including split-rated issuers | same as AA financial | Programs with at least one "A" or "BBB"/"Baa" rating, including split-rated issuers, but none with any ratings outside the "A"-"BBB"/"Baa" range |
| Industries included (primary SIC codes) | 6000-6999, excluding 6189 (asset-backed CP) and 6200-6299 (security broker/dealers) | 100-5999, 7000-9999 | 100-5999, 7000-9999 |
| Credit rating agencies considered | Fitch Investors Service, Moody's Investors Service, and Standard & Poor's |
| Credit rating reviews | Programs that would be included in an index calculation are excluded when (1) the issuer's credit ratings are under review and (2) a one-notch upgrade or downgrade would violate either credit rating criterion |
| SEC registration types | Both traditional programs (3(a)3) and private placements (4(2)) are included |
| Placement | Both dealer-placed and directly placed programs are included |
| Excluded trades | Foreign and credit-enhanced programs; secondary, repurchase agreement/financing, and interest-at-maturity trades |
| Weights | Trades are weighted by their face values |
Data to assess CP trades relative to these criteria are updated daily
from numerous publicly available sources. SIC code classifications are
taken from the SEC Directory of Companies Required to File Annual Reports
with the Securities and Exchange Commission. When an issuer's primary SIC
code is not reported in the SEC directory, the primary SIC code reported in
the issuer's financial reports is used; otherwise, SIC codes are determined
upon consultation with the Office of Management and Budget's Standard
Industrial Classification Manual or its Supplement.
Interest rates calculated through the process described above are a
statistical aggregation of numerous data reflecting many trades for
different issuers, maturities, dealers, etc. Accordingly, while the
reported interest rates purport to reflect activity in certain segments of
the market, they may not equal interest rates for any actual trades. As
with many other statistical processes, this one is designed to minimize
differences between interest rates at which actual trades occurred and the
estimated interest rates. Indeed, the process is precise relative to the
trades included in each calculation. For example, regarding thirty-day
nonfinancial CP sold by AA issuers, the average absolute difference between
the estimated interest rates and rates for actual trades, weighted by the
face values of relevant trades, was less than 1 basis point between
February 1996 and April 1997. Moreover, the estimated interest rates
closely approximate market participants' views of CP market pricing:
Between February 1996 and February 1997, the average difference between the
estimated interest rate and the quoted AA interest rate of a major dealer
was less than 1/3 basis point and statistically was not significantly
different from zero; in absolute value, the average difference was slightly
less than 2 basis points.
Release dates |
Daily update |
Historical data |
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