A sweep account is an account set up at a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

or other

financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...

where the

funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...

are automatically managed between a primary

cash account In business practice, cash account refers to a business-to-business or business-to-consumer account which is conducted on an immediate payment basis i.e. no credit is offered. In accounting practice, "cash account" or "cash book" refers to a da ...

and secondary investment accounts.

Function

A sweep account combines two or more accounts at a bank or a financial institution, moving funds between them in a predetermined manner. Sweep accounts are 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 businesses are types of corporations, partnerships, or sole proprietorships which have fewer employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to ap ...

owners. It has also become part of the arsenal of services offered by

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

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 either

money fund A money market fund (also called a money market mutual 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 managed with the goal of maintaining a ...

s, "eurodollar sweeps", or "repo sweeps".

Eurodollar Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States, which thus are not subject to the legal jurisdiction of the U.S. Federal Reserve. Consequently, such deposits are subject to much less regulation than ...

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 agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two par ...

") are for companies that are concerned about the safety of the bank. 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 A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...

and the

client Client(s) or The Client may refer to: * Client (business) * Client (computing), hardware or software that accesses a remote service on another computer * Customer or client, a recipient of goods or services in return for monetary or other valuabl ...

will discuss and determine an average balance that should be kept in this account. Depending on the institution's service, this amount may be pre-determined. #Most of the extra cash above the average balance will be invested into a

money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...

, CD, or some other form of investment that can be easily

liquidated Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistr ...

. #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 Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examini ...

, 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 to invest and for how long. This service is known controlled disbursement.

References

{{Authority control Banking terms

Function

Mechanics

How it actually works

Company policy issues

See also

References