Charles Schwab is making a number of changes to its brokerage cash "sweep" program, including expanding the amount of FDIC insurance and reducing the role of money market funds. In a revised "Cash Features Disclosure Statement," Schwab gives a "Summary of Changes to Schwab's Cash Features Program." They state, "Effective February 16, 2018, Schwab will begin introducing certain changes to its Bank Sweep and Schwab One Interest cash features. These changes include: Transitioning to an increase in the number of depository institutions participating in the Bank Sweep feature from one bank to two banks, both of which are affiliated with Schwab -- Charles Schwab Bank and Charles Schwab Signature Bank." (See also our Jan. 4 News, "Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump," and our Oct. 23, 2017 "Link of the Day," "Schwab Earnings Talk MMFs.")

Schwab explains, "For the Bank Sweep feature, adding an additional interest rate tier and having the interest rate tiers based upon deposit balances held through a single Schwab brokerage account ... rather than the value of assets in your household, referred to as a Household Balance.... For the `Schwab One Interest feature, adding an additional interest rate tier and having the interest rate tiers based on the free credit balance in a single Account rather than your Household Balance."

They tell us, "If Bank Sweep is the cash feature for your Account: On February 16, 2018, we will begin converting your feature to the multiple-bank version of the Bank Sweep feature. Schwab will provide you with at least 30 days' notice.... Until your feature is converted, you will continue to have the single-bank version of the Bank Sweep feature and your free credit balance will continue to be deposited into deposit accounts at Charles Schwab Bank without limit."

Schwab's update says, "Once your feature is converted to the multiple-bank version of the Bank Sweep feature, your free credit balance will be deposited in deposit accounts at our Affiliated Banks in the order indicated on the Affiliate Bank list included at the end of this Cash Features Disclosure Statement or pursuant to any subsequent notice you may receive. As a result, you will be eligible for an additional $250,000 per depositor of FDIC deposit insurance."

It continues, "If Bank Sweep is the cash feature for your Account: The amount of deposit account balances in the Affiliated Banks in one Account could be less than the value of the assets in your Household Balance, which generally would result in the interest rate being determined by a lower tier. As of February 16, 2018, the interest rate on all tiers is the same, and therefore the change in the manner in which your tier is determined will not impact the interest rate you receive on your deposits."

The disclosure explains, "For the Bank Sweep feature: You will need to maintain deposit balances at Charles Schwab Bank substantially in excess of the Federal Deposit Insurance Corporation's $250,000 insurance limit ($500,000 for joint Accounts) in order to qualify for the highest interest rate tiers.... After your feature is converted to the multiple-bank version, deposit account balances held by joint Accounts could be substantially or fully insured and qualify for the highest tiers."

It adds, "If Schwab One Interest is the cash feature for your Account: The amount of your free credit balance could be less than the value of assets in your Household Balance, which generally would result in the interest rate being determined by a lower tier. As of February 16, 2018, the interest rate on all tiers is the same, and therefore the change in the manner in which your tier is determined will not impact the interest rate you receive on your free credit balance."

Schwab tells investors, "For the Schwab One Interest feature, you will need to maintain a free credit balance that is substantially in excess of the Securities Investor Protection Corporation's ("SIPC") $250,000 coverage limit for cash in order to qualify for the highest interest rate tiers, but your free credit balance may be eligible for protection in excess of SIPC coverage through Schwab's excess SIPC coverage policy with a private insurer."

They explain, "Schwab intends to eliminate the Money Fund Sweep feature as a cash feature over a period of years. Clients who become ineligible for the Money Fund Sweep feature will receive prior notification of such change in eligibility.... Generally, new accounts opened by new and existing clients may not select the Money Fund Sweep feature as their cash feature. These Accounts may select either the Bank Sweep, Bank Sweep for Benefit Plans, or Schwab One Interest feature, subject to the eligibility rules set forth herein."

Finally, Schwab writes, "Generally, existing accounts may not change their cash feature from the Bank Sweep, Bank Sweep for Benefit Plans, or Schwab One Interest feature to the Money Fund Sweep feature. Certain accounts will continue to be eligible for the Money Fund Sweep feature, including Managed Accounts, International Accounts, and some Retirement Plan Accounts. Accounts at Schwab's international affiliates will have different available cash features."

For more news on brokerage sweeps, see our Oct. 12, 2017 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage," our May 9, 2017 News, "Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms," our Aug. 15, 2016 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes," and our June 29, 2016 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund." (Ask us too if you'd like to see our most recent Brokerage Sweep Intelligence for the latest rates.)

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