Definition

Cash sweep refers to the process by which excess funds in a bank account are automatically transferred into another account or investment that offers higher interest rates or better returns.

What is a cash sweep?

A cash sweep helps individuals or organisations optimise the use of their cash by ensuring that passive funds are not left sitting in low-interest accounts.

There are several common types of cash sweep arrangements:

1. Money market sweep accounts: Funds from a checking account are moved into a money market account, known for its higher interest rates compared to regular checking or savings accounts.
2. Repurchase agreements (Repo sweep): This involves transferring extra funds into short-term investments. Repos are short-term loans backed by securities, offering a secure and liquid option for storing cash.
3. Investment sweep accounts: Some brokerages provide cash sweep options. This enables investors to earn returns on their unused cash while retaining liquidity for trading or investment opportunities.
4. Loan sweep accounts: Extra funds in a checking account are used to repay outstanding loan balances. This reduces interest costs while still allowing access to cash when required.
5. Automatic transfers to external accounts: Some banks provide cash sweep services, automatically moving extra funds to external accounts at other financial institutions, like high-yield savings or investment accounts.

By automatically moving cash into higher-yielding accounts or investments, individuals and organisations can maximise their returns on cash balances. Furthermore, cash sweep arrangements can help manage risk by diversifying investments or reducing exposure to counterparty risk.

Example of a cash sweep

Suppose a corporation maintains €100,000 in its operating account, where it earns minimal interest. By establishing a cash sweep agreement, the bank automatically transfers any funds exceeding a predefined threshold, say €50,000, into a high-yield investment. Instead of earning minimal interest in the operating account, the excess €50,000 generates higher returns in the investment, enhancing the company’s overall cash management strategy while retaining €50,000 as a buffer for daily operational expenses.