Auction-Based Advances: Short-Term Funding at Attractive Rates
If your institution is in the position of utilizing advances for short-term funding, the Auction-Based Advance may be a great fit for your needs. The Auction-Based Advance is one of several Seattle Bank Fixed-Rate Advance products that provide short-term funding at very competitive rates. In fact, Auction-Based Advance rates are often below the interest rates charged for posted Fixed-Rate Advances with similar maturities.
To gain a good understanding of the Auction-Rate Advance, it’s helpful to know how the Seattle Bank raises funds. The Seattle Bank obtains its funding through the issuance of consolidated obligations (i.e., discount notes) by the Federal Home Loan Banks (FHLBanks). The discount notes are issued by the Federal Home Loan Bank System’s Office of Finance on behalf of the 12 FHLBanks. Auction-Based Advances are funded through a twice-weekly auction of short-term discount notes. These short-term discount notes are available in fixed terms of 28 days, 63 days, 91 days, and 182 days. The fact that these maturities are set at 7-day intervals allows our members to re-fund maturing Auction-Based Advances with another Auction-Based Advance.
Here’s how it works: On the day of the auction, the Office of Finance polls each of the 12 FHLBanks to find out if they’d like to place orders for auction funding, and if so, for which maturities. Once the orders are aggregated, the Office of Finance auctions the discount notes. The Auction-Based Advance rates are tied directly to the auction rates. Because the auction-based discount notes are often the Bank System’s most attractive funding source, the Auction-Based Advance rates are often 4 to 8 basis points lower than regular Fixed-Rate Advances with comparable maturities.
The Seattle Bank offers Auction-Based Advances twice a week, on Tuesdays and Thursdays. (Orders must be received by 8:15 a.m. Pacific Time). The proceeds of the advance are available the following day (i.e., on Wednesdays and Fridays).
Auction-Based Advances carry some operational nuances that are not associated with our other advance products. The first results from the fact that the Seattle Bank submits its order for auction-based funding to the Office of Finance based on the Auction-Based Advance orders submitted by our members. For this reason, the bank does not guarantee a rate when a member places their order. We will make our best attempt to provide our members with an accurate indicative rate for each maturity, but the interest rate on the advance will be determined by the actual results of the auction. Thus, the member bears the risk that the actual rate on the advance may vary from the indication. The fact that the borrower bears the market risk for the advance is one of the key reasons that the Auction-Based Advance rates are cheaper than posted term borrowings for similar maturities.
Second, if there are insufficient orders for a specific structure, the auction for that structure will not take place. In this case, the Member Services department will attempt to contact the member prior to the deadline to discuss alternatives. It should also be noted that Auction-Based Advances require an order of at least $100,000.
Erick Rendon is the Institutional Sales and Trading Manager at the Federal Home Loan Bank of Seattle.