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A sweep account is an account set up in a bank or other financial institution where funds are managed automatically between the primary cash account and the secondary investment account.


Video Sweep account



Function

A sweep account combines two or more accounts in a bank or financial institution, transferring funds between them in a prescribed manner. Sweep accounts are useful in managing the steady cash flow between the cash accounts used to make scheduled payments, and investment accounts where cash can earn higher returns.

Many banks and financial institutions offer sweep account services to private customers and small business owners. It also becomes part of the warehouse services offered by credit card companies.

Maps Sweep account


Mechanics

In banking, sweeping accounts are primarily used as legal solutions to the prohibition of paying interest on a business checking account. In this system, funds are described as "swept overnight" into such investment vehicles. Options for sweeping investments are often the following: money funds, and what are known as "Eurodollar Sweeps" or "Repo Sweeps".

The Eurodollar sweep is the transfer of legal funds to an offshore bank entity, although basically they are only accounting techniques to allow banks to have full loan funds without reserve requirements normally required and without having to pay for FDIC insurance (such as uninsured sweeps). Basically, these funds are only an unsecured bank liability, and therefore paid the highest interest rates offered by banks for an overnight deposit loan.

"Repo Sweeps" ("repo" meaning "repurchase agreement") is for companies concerned about bank security (usually with the mandate of a corporate charter and not because of the opinions of employees or finance staff). In this arrangement, funds stolen on deposits with banks are secured by some ownership of bank bonds. If the bank fails, the depositors will only be given bond holdings and then can sell the bonds to get their money back (unless something happens to the price of the temporary bond).

A larger corporate bank account is charged a lot for each service the bank offers (such as the cost per each paid check), but the bank revises these fees based on the company's account balance in a process known as account analysis.

How it works

In the sweep account

  1. A cash account is prepared first and a sum of money is deposited into that account.
  2. The financial advisor and client will discuss and determine the average balance to be kept in this account. Depending on the institutional service, this amount may be pre-determined.
  3. Most of the extra money above the average balance will be invested into money markets, CDs, or some other form of investment that can be easily cashed.
  4. When a balance in a cash account falls below a predetermined average balance, some investment is diluted and the result is deposited into a cash account, thus maintaining an average balance.

If the initial calculation is done correctly, interest on cash and return on investment should result in a substantial return that will increase the total value of the sweep account.

During a bad economic cycle, funds in an investment account may fall low enough so substantial profits will not be possible to maintain an average balance in the cash account. In this case, the financial institution will ask for additional funds to be included in the investment account, or recommend other forms of investment and liquidation.

The financial innovation of sweep accounts is very attractive because it is stimulated not only by the desire to avoid expensive regulation, but also by changes in supply conditions - in this case technology.

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Enterprise policy issues

Some companies choose to keep all of their funds into sweep accounts if they are confident that increased earnings will more than compensate for the costs they have already paid, in case they leave funds in the account. Other companies calculate the amount of estimates needed to cut costs and then just sweep more funds than that amount.

Companies pay extra for more complex investment strategies, and for more detailed communication from their banks. For example, knowing when the checks they issued may be obvious, allowing them to more precisely determine how to invest and for how long. This service is known as controlled channeling.

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See also

  • flexible mortgages
  • Sweep investment

src: docs.oracle.com


References

Source of the article : Wikipedia

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