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. In Accountancy, an account is a label used for recording and reporting a Quantity of almost anything A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money In Financial economics, a financial institution acts as an agent that provides Financial services for its clients or members Funding or financing is to provide capital (funds which means money for a project a person a business or any other private or public institutions Cash basis Cash-basis Accounting is a method of Bookkeeping that records financial events based on Cash flows and cash position
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 being described as being "swept overnight" into an investment vehicle of some kind. The choices for sweep investments are often the follwing: money market mutual funds, and what are known as "Eurodollar Sweeps" or "Repo Sweeps". Money funds (or money market funds, money market mutual funds) are Mutual funds that invest in Short-term debt instruments Eurodollar sweeps are legally 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 therefor are paid the highest interest rate offered by the bank to overnight deposit borrowings. "Repo Sweeps" 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. Some companies choose to have all of their funds swept into a sweep account if they believe that the increased earnings will more then 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. For more complex investment strategies companies pay extra for more detailed communication from their bank as to when checks written might clear, so that they can more precisely determine the amount of funds to invest and for how long, this service is known as controlled disbursement.
General
A sweep account is actually 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 owners. It has also become part of the arsenal of services offered by credit card companies. A credit card is part of a system of Payments named after the small Plastic card issued to users of the system
How it 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. A financial adviser is a professional who renders investment advice and Financial planning services to individuals and businesses 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 market, CD, or some other form of investment that can be easily liquidated. In Finance, the money market is the global Financial market for short-term borrowing and lending Market liquidity is a Business, Economics or Investment term that refers to an Asset 's ability to be easily converted through an act of buying
- 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. The term business cycle or economic cycle refers to the fluctuations of economic activity during its long term growth trend 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
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