Chapter 10 Sweeps

• Jurisdiction: United States

Chapter 10 Sweeps

Asweep function, when attached to a bank account, automatically transfers funds at the end of each business day to some sort of pooled investment that earns higher interest than that accruing on the deposit account itself. A sweep can require a minimum amount in the original account, with the surplus being swept to the higher interest-earning account, or a sweep can be established to transfer funds up to an established threshold amount each evening. A sweep account enables a customer to earn interest on cash that would otherwise earn nothing by sitting idle in a checking or deposit account.

A. A Common Sweep Program

A common sweep program transfers funds from a checking account to an investment or money market-pooled fund held by the deposit bank. The pooled funds then remain in the investment or money market pooled account until the customer's checking account falls below a pre-determined balance, at which time funds are moved back to the checking account from the investment or money market account. The investment or money market-pooled account used in a sweep program is supposed to be highly liquid, but sometimes there are delays in liquidating or accessing the funds. Even though the customer's funds are technically not in the deposit account, for accounting purposes the funds are still shown in the depositor's account.

B. An Overnight Sweep Program

Another common sweep program invests in the overnight market. The overnight market is generally an investment arrangement between banks, although mutual funds also participate in the overnight market. Funds are invested in an overnight pooled investment at a stated overnight rate. The overnight rate fluctuates throughout the business day. The overnight market is short-term and is generally considered to be of minimal risk. The overnight sweep program mirrors the program described above; however, in this iteration, the pooled...