Written by: Tom Meiman | Liquidity and Balance Services Product Line Manager, BNY Mellon Treasury Services
When regulatory prohibition of interest on commercial accounts (i.e., Reg Q) was lifted in 2011, commercial account holders had a potentially new and interesting set of questions to answer: how to integrate interest-bearing products into their overall cash management strategy. But for many years, the questions seemed largely theoretical, with the Fed Funds Rate hovering at 0.00% - 0.25%. The practical need to rethink options for handling a company’s operating cash began to emerge only in 2017; we’ve been hearing a surge in questions about the topic since interest rates started their steady climb to a current 1.75% - 2.00% target, and reasonable probability that they will continue to move.
Recently, I joined a couple of my colleagues in a webinar on the broader regulatory and environmental changes. We discussed new options for the care of operating cash, current market developments impacting how your organization handles liquidity, and effective strategies for managing excess operating cash, including an overview of the industry tools and investment options available. The full webinar recording is here.
Interest-Bearing and Hybrid accounts form an important element of today’s cash management strategies and merit a deeper dive into the options and implications.
Interest Bearing Accounts (Checking With Interest and Money Market Demand Accounts) look similar to the non-Interest Bearing accounts available prior to Req Q’s repeal. The key difference is that Checking With Interest typically offers unlimited transaction activity, with interest accrued on a monthly or quarterly basis. Money Market Demand Accounts are limited to six withdrawals per month by regulation, potentially with longer accrual periods and typically higher rates. Choosing the best value opportunity depends on the liquidity needs and transaction volume for specific entities or sub-entities.
Hybrid accounts introduce new features and options. I describe them as Interest Bearing Accounts that may also be eligible to receive earnings credits. The key is that the balances in Hybrid accounts will be able to generate both earnings credit and credit interest off of the same dollars. Calculations are performed daily for credits and interest and then accrued. In the first scenario, the credit interest is calculated at the defined credit interest rate for that account. The client receives the full value of the credit interest. When the earnings credit rate is greater than the credit interest rate, the earnings credit rate is discounted by the credit interest rate. When credit interest rates are less than earnings credit rates, clients see both earnings credits and credit interest. When credit interest rate is greater than earnings credits, there are no earnings credits generated.
Features of Interest-Bearing and Hybrid Accounts vary by provider, so it’s valuable to ask in detail and think through all the potential permutations of rate differentials. Bottom line, now that the options opened by the repeal of the former Reg Q have real-world implications to the way you view liquidity and short-term cash, you have more options to consider, with more opportunities to fine-tune your cash management process at lower cost and with greater value to your business.
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