What are CDARS One-Way Sell transactions?
CDARS One-Way Sell transactions enable your institution 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?
Your 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 you
- Help manage the balance sheet – One-Way Sell transactions do not create funding or on-balance-sheet liabilities for your bank
- Enhance profitability by earning fee income
- Improve return on assets and return on capital ratios by keeping deposits off balance sheet and generating non-interest income
And, if your bank’s liquidity position changes, it can bring funds back on balance sheet by placing reinvested deposits
as they mature through a CDARS® ReciprocalSM
transaction – all without affecting the customer relationship. Reciprocal transactions enable members to receive matching
deposits (instead of fee income) for their placements.
In fact, currently, Network banks employ various strategies, including utilizing 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:
- Your institution sets the interest rate2
- Your customer’s funds are divided into amounts below the standard FDIC insurance maximum ($250,000) and placed with other Network members
- Your customer can access multi-million-dollar FDIC insurance coverage through many banks while working directly with just your institution
- Your institution maintains full control over the customer relationship
- Your custome’s confidential information remains protected
How do One-Way Sell transactions differ from Reciprocal transactions?
-
You 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
- Your institution 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 your 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 your institution reaps the benefits right away.4 You 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 your institution with pricing leverage in the marketplace.
For example, if a rate-conscious depositor is looking for an aggressive rate (one that is higher than you ordinarily would be
willing to pay), you may be able to accommodate the depositor by offering a rate that is higher than you normally would pay,
but less than or equal to the One-Way Sell rate. Your 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 though One-Way Sell
are not on your balance sheet, they would not increase your weighted-average cost of funds.
Additionally, if, at any time, your institution does not want to offer a particular CD term, you can investigate whether a One-Way
Sell rate has been published for that maturity. If so, you 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 your 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, you get the benefits
of one rate per maturity, one statement, and the peace of mind associated with access to multi-million-dollar FDIC insurance. Many
Network members have done this – holding an average of over $4 million in CDs placed through CDARS for their own accounts.5
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 www.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.
5 As of 6/30/12.