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Catalyst Strategic Solutions

Overnight Sweep Account

Catalyst Funds Access

In December 2015, the Federal Reserve increased the benchmark short-term lending rate by 25 basis points. Many credit unions anticipated this development by establishing strategies to address the impact of gradually rising rates on their balance sheets.

Following the Fed action, Catalyst Corporate raised rates by 25 basis points on two of its key accounts – the Performance Tiered Account and the Excess Balance Account.

Member credit unions using Catalyst Corporate’s Excess Balance Account (EBA) continue to benefit from the Fed’s current policy to pay interest on excess balances. They also benefit from Catalyst Corporate’s overnight sweep feature. The sweep feature facilitates the effortless process of moving funds to and from the Fed each night. Many credit unions are interested in how the Fed’s recent rate increases will impact the future of the EBA and the sweep account.

Catalyst Corporate has a replacement for the overnight EBA sweep. Catalyst Funds Access will facilitate the transfer of funds from a member credit union’s overnight account into one or more money market funds. The trading platform is ready and will launch as soon as market conditions drive the change.

How will it work?

The execution of a required initial agreement happens first. Then, authorized individuals will be able to log into TranZact to establish a percentage of the credit union’s funds to move. The set amounts will move to the two or three available money market funds each evening. These individuals can alter the percentages at will. Prospectuses and offering circulars for each fund will reside in TranZact to assist credit unions with due diligence. The money market funds available through Catalyst Funds Access are by some of the largest fund managers in the world, with extensive professional funds management experience.

With Catalyst Corporate as aggregator, credit unions will earn interest at the highest possible tier. This tier will provide between two and four basis points in additional yield relative to what most credit unions could earn investing directly in a money market fund. Credit unions using Catalyst Funds Access will need to monitor their liquidity positions more closely, moving funds needed for settlements using a built-in Redemptions module.

As market conditions continue to evolve, so will the platform. Future improvements may provide access to fed funds and allow credit unions to deposit excess funds into large money center banks and credit unions.

When will it be available?

In the current rate environment, credit unions are better off keeping excess reserves in the EBA. However, it is anticipated that the Fed’s monetary policy will soon shift. When that shift happens, financial institutions may no longer earn a competitive return on funds in the EBA.

Prior to 2008, the Fed did not pay any interest on excess reserves. That year, legal authority was established allowing the Fed to pay interest on these funds in an amount as low as 75 basis points below fed funds. The interest rates paid on excessive reserves have remained high since then, relative to fed funds, which collapsed to zero percent during the financial crisis. Monetary policy, however, may soon dictate a return to historical rates. At that time, credit unions will need an alternative for placing excess liquidity, and the Catalyst Funds Access solution will go into effect.

Which credit unions are impacted?

Today, 450 credit unions use Catalyst Corporate’s EBA due to a cap on deposits that can be retained in the Performance Tiered Account. Of those, approximately 300 – those with the largest balances – will be transitioned to Catalyst Funds Access. The remaining credit unions will see an increase in the amount they are allowed to keep overnight at Catalyst Corporate. Catalyst Corporate anticipates that its balance sheet will grow by approximately $500 million, bringing Daily Average Net Assets to approximately $3 billion. Fortunately, Catalyst Corporate is well ahead of its regulatory capital targets and can accommodate this increase.

Some member credit unions that are operating without a trading desk due to current monetary policy are affected. Catalyst Funds Access will allow those credit unions to continue doing so under a variety of economic conditions. This will deliver a direct bottom line impact and help sustain the value that credit unions are able to return to their own members.

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