Sweep account
Encyclopedia
A sweep account is an account set up at a bank
or other financial institution
where the funds are automatically managed between a primary cash account and secondary investment accounts.
Many banks and financial institutions offer a sweep account service for personal customers and small business
owners. It has also become part of the arsenal of services offered by credit card
companies.
s, and what are known as "Eurodollar Sweeps" or "Repo Sweeps".
Larger corporate bank accounts are charged numerous fees for each of the services the bank offers (such as a charge per every check deposited), however the bank rebates these fees based on the companies account balances in a process known as account analysis.
If the initial calculations are done correctly, the interest on the cash and returns on the investments should yield a large enough return that will increase the total value of the sweep account.
During a bad economic cycle, the funds in the investment accounts may fall low enough that substantial gains will not be possible to maintain the average balance in the cash account. In these cases, the financial institutions would ask either for more funds to be put into the investment account, or recommend other forms of investments and liquidation.
The financial innovation of sweep accounts is particularly interesting because it was stimulated not only by the desire to avoid costly regulation, but also by a change in supply conditions- in this case technology.
Companies pay extra for more complex investment strategies, and for more detailed communication from their bank. For example, knowing when the checks they issue will probably clear, enables them to more precisely determine how much to invest and for how long. This service is known as controlled disbursement.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or other financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
where the funds are automatically managed between a primary cash account and secondary investment accounts.
Overview
A sweep account is a combination of two or more accounts at a bank or financial institution. It is useful in managing a steady cash flow between a cash account used to make scheduled payments, and an investment account where the cash is able to accrue a higher return.Many banks and financial institutions offer a sweep account service for personal customers and small business
Small business
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...
owners. It has also become part of the arsenal of services offered by credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
companies.
Mechanics
In banking, sweep accounts are primarily used as a legal workaround to the prohibition on paying interest on business checking accounts. In this system, the funds are described as being "swept overnight" into an investment vehicle of some kind. The choices for sweep investments are often the following: money fundMoney fund
A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield...
s, and what are known as "Eurodollar Sweeps" or "Repo Sweeps".
- EurodollarEurodollarEurodollars are time deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins. The term...
sweeps are legal transfers of funds to the bank's offshore entities, although essentially they are just an accounting technique to allow the banks to have full lending of the funds without the reserve requirements normally required and without having to pay for FDIC insurance (as the sweep is uninsured). Essentially, the funds are just unsecured obligations of the bank, and therefore are paid the highest interest rate offered by the bank to overnight deposit borrowings.
- "Repo Sweeps" ("repo" meaning "repurchase agreementRepurchase agreementA repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
") are for companies that are concerned about the safety of the bank (usually by mandate of the companies/institutions charter and not due to the opinions of the employees or financial staff). In this arrangement, the swept funds on deposit with the bank are secured by some of the bond holdings of the bank. If the bank were to fail, the depositor would just be given the bond holdings and then could sell the bonds to get their money back (unless something happens to the bond prices in the interim).
Larger corporate bank accounts are charged numerous fees for each of the services the bank offers (such as a charge per every check deposited), however the bank rebates these fees based on the companies account balances in a process known as account analysis.
How it actually works
In a sweep account- A cash account is set up first and a lump sum of money is deposited into that account.
- A financial advisor and the client will discuss and determine an average balance that should be kept in this account. Depending on the institution's service programs, this amount may be pre-determined.
- Most of the extra cash above the average balance will be invested into a money marketMoney marketThe money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
, CD, or some other form of investment that can be easily liquidatedMarket liquidityIn business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
. - When the balance in the cash account falls below the pre-determined average balance, some of the investment is liquidated and the proceeds get deposited into the cash account, thus maintaining the average balance.
If the initial calculations are done correctly, the interest on the cash and returns on the investments should yield a large enough return that will increase the total value of the sweep account.
During a bad economic cycle, the funds in the investment accounts may fall low enough that substantial gains will not be possible to maintain the average balance in the cash account. In these cases, the financial institutions would ask either for more funds to be put into the investment account, or recommend other forms of investments and liquidation.
The financial innovation of sweep accounts is particularly interesting because it was stimulated not only by the desire to avoid costly regulation, but also by a change in supply conditions- in this case technology.
Company policy issues
Some companies choose to have all of their funds swept into a sweep account if they believe that the increased earnings will more than offset the fees they would have been rebated, should they have left the funds in the account. Other companies calculate the approximate amount needed to rebate the fees and then only sweep funds in excess of that amount.Companies pay extra for more complex investment strategies, and for more detailed communication from their bank. For example, knowing when the checks they issue will probably clear, enables them to more precisely determine how much to invest and for how long. This service is known as controlled disbursement.