The Federal Reserve enacted the special purpose vehicles (SPV). LLC and cannot be categorized into any of the consolidated guidance. This is based on Municipal liquidity facility as an LLC and variable interest model as well as ASC 10 of scope exception. Therefore, it cannot be classified as government organization, employee benefit plans, money market funds and specific investment firms. Since the SPV is not a regulated firm based on the Investment Company Act of 1940, the firm should take into consideration the following concepts: ‘
The characteristic of an investment company includes the following. First, its an entity that performs the functions such as obtaining funds from one or several investors and the investor is provided with investment management services. However, the SPV doesn’t offer the investment management services. The second function of the entity is committing to an investor the purpose of the business and specific activities. It is used for investing the funds mainly for returns generated from investment income, capita appreciation or both. The main purpose of the SPV is improving the liquidity position of the municipal’s securities in the short term in the market.
The second fundamental characteristics of investment company includes the firm or subsidiaries lacking to obtain or objective of generating benefits. Returns from affiliates or investee which are not attributed to the ownership interest or investment income other than the capital appreciation. For the case of the SPV, they are only focused on liquidity backstop of its issuers for eligible notes based on the SPV. Eligible notes include bond anticipation notes (BAN), tax anticipation notes (TAN) or similar short notes. They are issued by the Eligible Issuer assuming the notes mature within 36 months since its issuance.
Other typical characteristic of an investment company includes having more than one investment. The purpose of the SPV is enhancing liquidity of the main short-term securities. It is done through the municipal by purchasing issuance Tax Anticipation Notes (TANs), Bond anticipation notes (BANs) and Tax and Revenue. In anticipation Notes (TRANs) or other short-term notes from credible issuers. The maximum amount allowable to be purchased by the SPV is $500 billion. Investment company should have more than one investor. However, the SPV has the managing member with membership interest and receiving two tranches from Treasury as equity investment for the preferred equity member (FRBNY).
Application of the variable interest model in Municipal Liquidity Fund LLC is inapplicable in the case of SPV. It doesn’t benefit from the organization. It has separate account for life insurance entity. It’s not a business as described in Topic 805 and it’s not an entity that came into exitance before 12/31/03. Therefore, the scope exception to the variable interest model doesn’t apply in the case. Following the inapplicability of the scope of exception, the reporting entity should have a variable interest.
The registered entity is associated with risks because of the interest it has in an entity. However, the variable interests model takes into consideration only the interests that absorbs the variability of the entity. Its made for create and distribution. The variable interests are equity and contractual or other financial interest where the portions of the entity are absorbed. The VIE loss expected or receive expected returns and make changes with fair value of the net assets of the VIE.
Despite the Treasury being the main member of the entity and retains at least 90% of residual assets from the beginning following the SPV termination. It lacks the consent, voting, management, approval or control of rights. The Treasury being the preferred member of equity. It has the objective of absorbing the losses that have not been covered by the SPV assets. Furthermore, if the losses become higher than initial contribution by equity. The remaining equity, the FRBNY will assume all the losses since it acts as managing member. Neither the investment or administrator manager is allowed to maintain risks for all purchase payments of securities or service fees is not being paid through asset liquidation in the account of investment. The FRBNY is said to have made an equity contribution of $10