Denver-based Community Bank Funding Company, which is affiliated with Republic Financial, is seeking to expand the investor base in its Capital Markets CD (CMCD) product to include money market mutual funds. The company has been packaging FDIC-insured certificates of deposit issued by community banks into AAA-rated, 144A medium-term notes programs with a floating rate, 1-year term.

CBFC President Rich Marshall tells us, "We are actively targeting money market funds and are contemplating inserting a 7-day put to ensure liquidity.... The notes are backed by FDIC-insured CDs -- [so it's] U.S. Government risk. The investor is getting 'full faith and credit' at a 25 bps pickup." He says the company uses Wilmington Trust as its as trustee and just completed a joint-marketing deal with SunGard STN for an eTN (electronic trading network) platform for institutions to purchase CDs.

Marshall says, "The structure allows money funds to buy CDs that are FDIC insured." CBFC, he says, owns a patent to this process, and they hope "securitized CDs" to become a new asset class. Marshall notes that community banks represent $3 trillion out of the $13 trillion in the banking system. He also expects the product's yield to be very competitive. "The reason we're having to pay the increased yield, we're the new kid on the block," he tells us.

While it remains to be seen whether the product will find a home in money market funds, it's clear that funds are actively seeking new, ultra-safe diversified sources of supply. Over the past year, money funds have shifted their investment allocations to compensate for the drop in asset-backed commercial paper supply. Though Treasury, government agency and repo have filled the void, bank CDs have also been popular.

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