CDARS® One-Way Sell®
What is CDARS One-Way Sell?
CDARS One-Way Sell enables institutions to provide customers with easy and convenient access to multi-million-dollar FDIC insurance on CD investments1 and to sell excess CDARS deposits to other Promontory Network members for fee income. With One-Way Sell transactions, highly liquid banks can attract and retain valuable customer relationships without adding to their balance sheets.
Why would your institution want to use One-Way Sell transactions?
An institution can use One-Way Sell to
- maintain a consistent presence in the market;
- increase market share by encouraging safety-conscious depositors to consolidate their CD investments with one relationship institution;
- help manage the balance sheet – One-Way Sell transactions do not create funding or on-balance-sheet liabilities for banks;
- enhance profitability by earning fee income; and
- improve return on assets and return on capital ratios by keeping deposits off balance sheet and generating noninterest income.
And, if the bank’s liquidity position changes, it can bring funds back on balance sheet by placing reinvested deposits as they mature through a CDARS® ReciprocalSM – all without affecting the customer relationship. CDARS Reciprocal enables members to receive matching deposits (instead of fee income) for their placements.
In fact, currently, Network banks employ various strategies, including utilizing both Reciprocal and One-Way Sell to manage their CD offerings, interest rate risk, and more to optimize their liquidity and profitability.
As with Reciprocal transactions
- institutions set the interest rate;2
- customer’s funds are divided into amounts below the standard FDIC insurance maximum ($250,000) and placed with other Network members;
- customers can access multi-million-dollar FDIC insurance coverage through many banks while working directly with just the relationship institution;
- institutions maintain full control over the customer relationship; and
- customer’s confidential information remains protected.
How do One-Way Sell transactions differ from Reciprocal transactions?
- Member institutions need customer consent to place funds through a One-Way Sell transaction. Most customers do not mind doing this, although some, including most public fund depositors, are subject to restrictions that may preclude them from using One-Way Sell transactions.3
- Institutions will receive fee income (not matching deposits) for placing funds with other Promontory Network members.
- Because funds are not exchanged on a dollar-for-dollar basis, banks may not advertise the ability to use the full amount of deposits for lending in the local community. However, CDARS Reciprocal transactions can fill the need for customers who want their funds to stay local.
What’s the bottom-line impact?
The math is easy. When an institution places a deposit through a One-Way Sell transaction, it can keep the difference between Promontory’s One-Way Sell rate and the rate your institution has agreed to pay its customer. Promontory pays the difference up front so that the member institution reaps the benefits right away.4 Members pay no transaction fees – “what you see is what you get.”
What else should you know?
Besides generating fee income, One-Way Sell transactions can provide institutions with pricing leverage in the marketplace. For example, if a rate-conscious depositor is looking for an aggressive rate, member institutions may be able to accommodate the depositor by offering a rate that is higher than it normally would pay, but less than or equal to the One-Way Sell rate. The institution would simply sell the funds acquired from the depositor (just the funding, not the relationship) to other members of the Promontory Network. Because those funds placed through One-Way Sell are not on your balance sheet, they would not increase its weighted-average cost of funds.
Additionally, if a member institution does not want to offer a particular CD term, it can investigate whether a One-Way Sell rate has been published for that maturity. If so, it can offer that term (at or below the One-Way Sell Rate), knowing that incoming funds will not negatively affect your institution’s balance sheet.
Finally, keep in mind that an institution can place its own funds through a One-Way Sell transaction. Often, funds can be placed at compelling rates – rates that may compare favorably to Treasuries and agency instruments. And, it benefits of one rate per maturity, one statement, and the peace of mind associated with access to multi-million-dollar FDIC insurance.
1 Limits apply.
2 For One-Way Sell, the interest rate set by your institution must be at or below the available One-Way Sell rate. Available One-Way Sell rates are updated each week and posted to a secure portion of promnetwork.com for Network members.
3 If a depositor is subject to restrictions with respect to the placement of funds in depository institutions, it is the responsibility of the depositor to determine whether the placement of the depositor’s funds through CDARS, or a particular CDARS transaction, satisfies those restrictions.
4 If the CDs placed through One-Way Sell are withdrawn prior to maturity, your bank will be required to return a proportional amount of the fee earned.