Investment News published the editorial, "Keep sweep accounts clean and transparent," which is subtitled, "Idle cash is a significant profit center for broker-dealers." The opinion piece tells us, "In 'olden' days, or at least up until the mid-1990s, the Glass-Steagall Act prohibited commercial banks from owning or operating brokerage firms, and equity trades required five days to settle. Since then, much has changed. Banks and brokerage firms now operate under one roof. And settlement -- the process of going from transaction to receiving payment or securities -- has shrunk to two days. But concerns remain about whether brokerage firms are giving investors a fair deal on cash -- whether it's the cash received when securities are sold or the cash that must be available for securities to be purchased."
They continue, "Unlike in the past, when idle cash sitting in a customer's brokerage account typically received no interest, cash today usually is swept into a money market mutual fund or into a money market bank account, typically at a bank that is a unit of the same parent as the broker-dealer. As noted in a recent report by Mark Schoeff Jr., the Financial Industry Regulatory Authority Inc. will be making brokerage firm cash sweep programs one of its examination priorities this year, citing its own worries and those of the Securities and Exchange Commission. Essentially, Finra is concerned that brokerage firms may be encouraging customers to use in-house bank sweep accounts without informing them of other alternatives for cash management, namely money market mutual funds."
Investment News writes, "To be sure, the bank sweep accounts offered by brokerage firms come with several user conveniences, including debit cards and ATM withdrawals. At the same time, bank sweeps often pay far less interest than money market funds -- about 175 basis points less, on average, according to Bankrate.com. What's left unstated by Finra is that it is clearly in a broker-dealer's financial interest, and not necessarily in the customer's, to avoid money market mutual funds and instead steer idle cash to a bank sweep account.... This creates an ethical and business conflict for firms: Do the right thing for the customer by enabling them to earn a higher return on their cash, or do the right thing for the firm by keeping those returns in-house?"
IN says, "With brokerage commissions falling to zero at many of the largest firms, interest earned on idle cash -- or in this case, the spread between what brokerage firms pay customers on bank sweep account balances and what their parent firm earns on those funds as an institutional investor -- is a significant profit center for broker-dealers. It is not likely one they will want to cede."
The Opinion adds, "Finra said it will take several factors into consideration when looking at firms' sweep practices, most of which involve clear and complete disclosure of where the cash is going and the alternatives available to the investor. Among the many specifics it will be reviewing are whether firms omit or misrepresent material information concerning the relationship of the brokerage accounts to partner banks, the nature and terms of the arrangements, and the amount of time it may take for customer funds to reach the bank accounts."
Finally, they conclude, "In the old days, there was little investors could do to speed the settlement process or share in part of the sizable interest earned by brokerage firms on the cash that coursed leisurely through customer accounts on the way toward settlement. In those days, too, brokerage firms were often less than diligent about making sure idle cash was moved promptly into customers' hands -- prompting complaints about 'dirty sweeps.' In today's faster, interconnected world, there is no reason for anything other than clean sweeps. Let's hope that Finra's efforts result in more transparency and greater cleanliness in the cash sweep process."
In related news, rates on money market funds and brokerage sweep accounts remained flat in the latest week. Our Money Fund Intelligence Daily shows that the flagship Crane 100 MF Index remaining flat at 1.42%. The Crane 100 is down from 1.81% on Sept. 30 and down from 2.18% on June 30. It is down 77 bps from the beginning of 2019 (2.23%), but up from its near low of 0.06% ten years ago (12/31/09). The Crane Brokerage Sweep Index, which is currently 0.12%, is up 7 bps from ten years ago (0.05%) and down 16 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of Friday, Jan. 31, shows no major brokerages lowering rates in the past week.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data, shows a 7-day yield of 1.30%, unchanged in the week through Friday, Jan. 31. Treasury Inst MFs were flat at 1.32%. Government Inst MMFs and Prime Inst MMFs were also flat in the latest week, holding at 1.38% and 1.52%, respectively. Treasury Retail MFs currently yield 1.05%, (unchanged), Government Retail MFs yield 1.06% (unchanged), and Prime Retail MFs yield 1.35% (down 0.01%), Tax-exempt MF 7-day yields increased 0.07% to 0.55%.
Crane's Brokerage Sweep Index remained flat at 0.14% in the week ended January 31 (for balances of $100K. E*Trade and TD Ameritrade currently have the lowest rate for balances at the $100K level (0.01%). Meanwhile, Fidelity continues to have the highest sweep rate (0.82%). (Fidelity also has a higher-yielding money fund option for new accounts.) Morgan Stanley is paying 0.03%. UBS, Merrill, Raymond James and Wells Fargo are all paying 0.05%, and Schwab is paying 0.06%. Ameriprise is paying 0.08% and RW Baird is paying 0.33% for balances of $100K.
Our MFI Daily, with data as of January 31, shows money fund assets have fallen $5.9 billion over the past week to $3.926 trillion. Prime assets were down $6.8 billion, while Government assets were up by $2.5B. Tax-Exempt MMFs decreased $1.6 billion. The MFI Daily also shows money fund assets down $51.8 billion month-to-date to $3.926 trillion. Prime assets are down $11.1 billion MTD, while Government assets are down by $39.4B. Tax-Exempt MMFs decreased $1.2 billion. Prime and Government MF assets were up $378.7 billion and $492.6 billion in 2019, respectively.
For more, see our latest Brokerage Sweep Intelligence, or see these Crane Data News articles: FINRA Fallout: More on Sweeps, Fin-Tech Cash Accounts by ignites, FP (1/22/20), Finra Latest To Scrutinize Sweeps (1/15/20), Ignites on UBS Sweep Changes (12/9/19), More on Regulators and Sweeps (11/25/19) and SEC Warns on Cash Sweeps (11/12/19).
