A sweep agreement is a legal agreement between a bank and its deposit account holders that allows the bank to automatically transfer funds from a deposit account to a related investment account, usually an overnight investment account. The purpose of the sweep agreement is to optimize the use of funds by ensuring that idle or excess funds in a deposit account are invested in an interest-bearing account.
The sweep agreement works by automatically transferring funds from a deposit account to an investment account at the end of each business day, thereby reducing the balance in the deposit account to a predetermined minimum amount, usually a few hundred dollars. The transferred funds are then invested in an overnight investment account that typically earns a higher interest rate than the deposit account.
The sweep agreement is a convenient and effective way for deposit account holders to earn additional interest income on their idle or excess funds without the need for active management of their funds. The sweep agreement also provides a measure of security by ensuring that funds are invested in low-risk overnight investment accounts that are insured by the Federal Deposit Insurance Corporation (FDIC).
However, it`s important to note that sweep agreements may have associated fees or minimum balance requirements. As such, it is recommended that deposit account holders carefully review the terms and conditions of the sweep agreement before agreeing to it.
In conclusion, a sweep agreement is a legal agreement between a bank and its deposit account holders that allows the bank to automatically transfer funds from a deposit account to a related investment account, usually an overnight investment account. This agreement is a convenient and effective way to optimize the use of funds and earn additional interest income on idle or excess funds. However, deposit account holders should carefully review the terms and conditions of the agreement to ensure that it is a suitable option for their financial needs.