Automated Investment Sweep

An automated investment sweep is a cash management service in which a bank automatically moves money above an agreed target balance out of a company's or individual's operating account and into an interest-earning investment, usually at the end of each business day. The funds come back the next morning, or as soon as the account needs them, so the customer earns a return on idle cash without having to place investments by hand.

Investment sweeps are one type of sweep account arrangement. Common destinations are a money market fund, an overnight repurchase agreement with the bank, or an interest-bearing deposit. They are usually set up under an account sweeping agreement and sit alongside other tools of treasury management, such as cash pooling and target balance accounts.

Picture a shop that keeps a fixed float in the till, say enough coins and notes to make change. At closing time, everything above the float goes into the safe, where it earns a little interest, and the next morning the till starts again with the same float.

An automated investment sweep does the same for a bank account. The business agrees how much it wants to keep in its everyday account. Each evening the bank's systems move any extra into an investment, and each morning they bring it back. If the account is short, money flows the other way. No one has to remember to do it.

At the end of the day, after the bank has posted the day's payments, the sweep amount is calculated as:

If the result is positive, that amount is invested overnight; if it is negative, the bank redeems investments or draws on a linked credit line to bring the account back to target. Suppose a company sets a target balance of $250,000 and its account closes at $1,400,000. The sweep invests $1,400,000 − $250,000 = $1,150,000 overnight. The next morning the $1,150,000 returns with one day's interest, credited daily or monthly depending on the product.

Banks often combine sweeps with a concentration account and zero balance accounts, so cash from many subsidiary accounts is gathered into one account first and only the net surplus is swept.

• Money market fund sweep. Surplus is invested in shares of a government or prime money market fund chosen from the bank's menu.
• Repo sweep. The bank sells the customer securities overnight and buys them back the next day, so the customer's cash is backed by collateral, often government securities.
• Deposit sweep. Funds move into an interest-bearing account at the same bank, an offshore branch or a network of partner banks, the model behind many brokerage deposit sweep programs.
• Loan sweep. Surplus pays down a revolving credit facility instead of being invested, reducing interest cost; shortfalls draw on the facility.

In the United States, sweeps grew mainly because banks were long prohibited from paying interest on business demand deposits under Regulation Q. Sweeps let banks offer a return by moving money out of the demand account each night. The prohibition was repealed in 2011 under the Dodd-Frank Act, but sweeps remain popular because they automate surplus investment and can reach products with higher yields than a deposit. Many companies weigh a sweep against an earnings credit, which offsets bank fees rather than paying interest.

Companies usually choose sweep vehicles that fit their investment policy statement. A sweep handles day-to-day surplus, while longer-term balances are placed in a short-term investment portfolio of instruments such as commercial paper and treasury bills.

Swept funds can change their legal and protection status. Money invested in a money market fund or held under a repo is generally not a deposit, so it is not covered by deposit insurance; instead the customer relies on the fund's assets or the repo collateral. Money market fund reforms, including liquidity fees that some institutional funds may charge in stress, can affect how quickly cash is returned. Yields on sweep products are often lower than those available by investing directly, and fees reduce net returns. Finally, a sweep that empties the account can make overdrafts more likely if late payments arrive after the cut-off, which is why the target balance is set with care.