Understanding Cash Sweep and Bank Deposit Options

Cash sweep is a way to manage excess cash in a fund by transferring it to a bank account. This helps keep cash reserves low and ensures that investors' money is working hard to generate returns.

There are two main bank deposit options for cash sweep: overnight sweep and longer-term deposits. Overnight sweep, as seen in a fund's example, involves transferring excess cash to a bank account overnight, earning a small interest rate.

A longer-term deposit, also known as a time deposit, locks up cash for a fixed period, typically ranging from a few months to a few years, in exchange for a higher interest rate. This option is often used by funds that expect to have excess cash for an extended period.

By using cash sweep and bank deposit options, funds can efficiently manage their cash reserves and generate returns for investors.

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A cash sweep is an optional prepayment of debt that uses excess free cash flows in advance of the originally scheduled repayment date.

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This means that once all mandatory payments have been met, a borrower can opt to pay down a portion of its outstanding debt earlier than anticipated.

Excess cash is the key to making a cash sweep possible, and it's essential to have a clear understanding of your financial situation to determine if you can afford to make prepayments.

The cash sweep can be a strategic move to reduce debt and save on interest payments over time.

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The more assets you hold with a bank, the higher your interest rate will be for the cash deposited into their sweep program. This is how cash sweep works in a nutshell.

The Expanded Bank Deposit Sweep provides up to $1.25 million in FDIC insurance for eligible clients, with joint accounts offering up to $2.5 million. This is a significant protection for your deposits.

In the Expanded Bank Deposit Sweep Program, cash may be swept to only affiliated banks, only unaffiliated banks, or a mix of both, depending on market conditions and the size of your account. This flexibility can help you make the most of your cash sweep.

Balances in excess of $1,250,000 in the Expanded Bank Deposit Sweep will be deposited at Wells Fargo Bank N.A. and may not be FDIC insured. This is something to keep in mind when managing your cash sweep.

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A cash sweep account is a service offered by many brokerage firms that automatically collects and deposits uninvested cash from your account into affiliated bank accounts.

Brokerages use your idle cash as a low-cost source of funding for their operations, earning interest on it. Charles Schwab reported about $399 billion in client sweep cash balances in March 2024, a huge sum of money to earn interest on.

The interest earned on uninvested client cash balances is a significant source of revenue for brokerages. In 2023, Charles Schwab generated nearly half of its $18.8 billion in revenue from net interest income.

Brokerages often pass a small portion of this interest back to you, but they keep the lion's share for themselves. They can use these profits to offer lower commissions, free trades, or discounted fees.

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Our Bank Deposit Sweep Program is designed to help you earn higher interest rates on your cash deposits. The more assets you hold with us, the higher your interest rate will be.

The Expanded Bank Deposit Sweep provides up to $1.25 million in FDIC insurance ($2.5 million for joint accounts with two or more owners) for eligible clients. This is the primary Cash Sweep Vehicle for eligible clients.

Balances in excess of $1,250,000 ($2.5 million for joint accounts) for the Expanded Bank Deposit Sweep will be deposited at Wells Fargo Bank N.A. and may not be FDIC insured.

The Standard Bank Deposit Sweep is an alternative to the Expanded Bank Deposit Sweep, providing up to a minimum of $500,000 in FDIC insurance ($1 million for joint accounts with two or more owners).

Resource accounts and retirement accounts in our discretionary advisory programs are eligible only for the Standard Bank Deposit Sweep.

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Some brokers pay interest on uninvested customer funds, but the rates are often very low, typically less than 0.2 percent.

For example, E-Trade, J.P. Morgan, and Charles Schwab offer rates of 0.01 percent APY on brokerage accounts, regardless of balance size. Fidelity, on the other hand, offers a more attractive rate of 4.94 percent APY through its Fidelity Government Money Market Fund.

To earn a higher interest rate, you may need to have a larger portfolio or subscribe to a specific service, such as Robinhood Gold, which offers a 4.5 percent APY through its brokerage sweep program.

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If you're not satisfied with the interest rates offered by your current brokerage firm, it's worth exploring other options. Some brokerage firms offer higher-yielding money market funds as an alternative settlement account option to bank cash sweeps.

Fidelity, for example, offers a money market fund as the default cash sweep option, yielding 4.89 percent as of Sept. 25. Vanguard customers can also choose the Vanguard Federal Money Market Fund as their brokerage settlement option, yielding 4.89 percent.

You can earn interest on uninvested cash in your brokerage account, but the rates may be low. E-Trade, for instance, offers just 0.01 percent APY on brokerage accounts with less than $500,000 in cash.

Some companies offer more attractive rates, though. Fidelity, for example, provides the Fidelity Government Money Market Fund (SPAXX), yielding 4.94 percent as of Sept. 12, as the default on uninvested cash in brokerage accounts.

Here are some brokerage firms that offer higher-yielding cash sweep options:

It's essential to check your brokerage firm's policies and fees before making a switch.

To model LBO debt paydown, you first need to calculate the free cash flow once all required payments are met, including the mandatory amortization of debt.

The excess cash is the amount remaining after accounting for cash flow from operations, investing, and financing in the current period.

The formula for the cash sweep must also consider the "rolled-over" excess cash on the balance sheet from the prior period.

Additionally, the minimum cash balance of the company must be taken into consideration.

Here are the key factors to consider when modeling LBO debt paydown:

Cash Sweep Rates can be a bit of a mystery, but let's break it down. Some brokers pay interest on uninvested customer funds, but not all do. Those that do tend to offer negligible rates of return, often less than 0.2 percent. For example, E-Trade offers just 0.01 percent APY on brokerage accounts with less than $500,000 in cash.

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J.P. Morgan brokerage accounts earn the same 0.01 percent through its deposit sweep program, regardless of balance size. Even Charles Schwab, which earned its spot on Bankrate’s list of best brokers, offers just 0.2 percent APY on uninvested cash in brokerage accounts. Fidelity, on the other hand, provides a more attractive option, yielding 4.94 percent as of Sept. 12 through the Fidelity Government Money Market Fund (SPAXX) as the default on uninvested cash in brokerage accounts.

Some companies offer more attractive rates, though. Fidelity IRA customers with cash balances less than $100,000 can earn 2.47 percent APY as of Sept. 25 on uninvested cash through the broker’s FDIC-insured deposit sweep program. Meanwhile, Robinhood offers a 4.5 percent APY through its brokerage sweep program as of Sept. 26 — but only for Robinhood Gold subscribers.

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The Bank Deposit Sweep Program offers up to $1,250,000 in FDIC insurance for deposits in your Wells Fargo Advisors account when deposits are held at all five Program Banks in the Expanded Bank Deposit Sweep Program.

Your interest rate will be higher with more assets held with Wells Fargo Advisors.

Balances in excess of $1,250,000 will be deposited at Wells Fargo Bank N.A. and may not be FDIC insured.

For more insights, see: Wells Fargo Active Cash Card Cash Advance Fee

Bok Financial Securities is a subsidiary of BOK Financial Corporation, a bank holding company that operates in the United States.

BOK Financial Securities offers a range of financial services, including cash sweep accounts, which allow businesses to pool their cash and invest it in low-risk investments.

BOK Financial Securities has a dedicated team that oversees the cash sweep process, ensuring that businesses' cash is invested in the most suitable investments.

The cash sweep accounts offered by BOK Financial Securities are designed to help businesses earn a higher return on their cash while minimizing risk.

BOK Financial Securities uses a tiered pricing structure for its cash sweep accounts, with different pricing levels based on the amount of cash swept.

Businesses can choose to sweep their cash into various types of investments, such as money market funds or commercial paper, depending on their needs.

We've partnered with a variety of banks to offer our Cash Sweep Program.

Below are some of the banks that participate in our program.

Your funds are also insured when held directly by us as part of the Cash Sweep Program, subject to SIPC limitations and supplemental insurance protections.