The Auction Advance: The Seattle Bank’s “Silent Auction”

One often associates an estate, charity, or even a livestock auction, with the cry of the auctioneer or the pounding of the gavel. In the case of the Seattle Bank’s Auction Advance, however, your regular perusal of the “Rates” page on the Seattle Bank’s website offers access to highly competitive short-term rates.

Simply defined, the Seattle Bank’s Auction Advance is an advance that is funded through a sale of short-term consolidated obligations or discount notes that are often at a lower rate of interest than short-term fixed-rate advances.’ Recent auction levels have accorded Seattle Bank members access to funding that is almost 10 basis points below posted short-term advance rates. As an example, last week’s earlier auctions yielded available levels of 22 basis points for 28-day maturities and 30 basis points for 182-day maturities.

We’re often asked, “What role does the auction play the Auction Advance?” There is no literal auction that takes place among member borrowers for this short-term funding. Rather, the auction process refers to how the Seattle Bank raises the funds for this product: via the issuance of discount notes into the global capital markets. These discount notes are issued to investors on a joint-and-several basis on the part of each of the 12 Federal Home Loan Banks (FHLBanks). Auction Advances are funded through twice-weekly auctions of short-term discount notes, which are available in fixed terms of 28 days, 63 days, 91 days, and 182 days. We find that the availability of short-term maturity intervals allows our members to re-fund maturing Auction Advances with another Auction Advance on a rolling basis.

The Auction Advance is offered on Tuesdays and Thursdays of every week. Orders must be received by 8:15 a.m. Pacific Time. The advance proceeds are available the following day (i.e., on Wednesdays and Fridays). If it appears that there may be insufficient orders for a specific maturity, our Member Services team will attempt to contact the member prior to the order deadline to discuss other funding alternatives. The minimum order size is $100,000.

Looking under the hood, here is how the auction process functions:

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 Advance rates are tied directly to the auction rates. The auction-based discount notes are often the FHLBank System’s most attractive funding source, and Auction Advance rates have recently been in the range of seven-to-10 basis points lower than regularly-posted Fixed-Rate Advances with comparable maturities.

Here’s another angle, above-and-beyond shorter-term fixed-rate Auction Advances: Consider using the Auction Advance structure as a longer-maturity advance with regular re-pricing cycles that are based on 28-, 63-, 91-, or 182-day tenors. For final maturities of up to 10 years, an advance can be structured at a rate that would equal the auction index plus a pre-determined spread that would remain consistent throughout the loan. The benefits of an intermediate- to longer-term floating advance would be two-fold: (1) the ability to procure an extended term, and (2) the ability to procure low-cost funding that is inherent with the current rate environment.

Don’t let the Auction Advance, the Seattle Bank’s “silent auction,” pass you by. Track auction rates on a regular basis and call your Relationship Manager for further details.

Figure 1.

Auction Advances – Key Characteristics:

  • -  Occur twice weekly.
  • -  Orders due by 8:15 a.m. Pacific Time, Tuesdays and Thursdays.
  • -  Proceeds available Wednesdays and Fridays.
  • -  Minimum order size $100,000.
  • -  Interest calculated on an actual/360-day basis, payable monthly via automatic debit to member’s DDA on the first day of each month and at maturity.
  • -  Available maturity dates: Fixed-rate advance with terms of 28, 63, 91, and 182 days.
  • -  Members are notified of auction rate results following the discount rate auction.

John P. Biestman, CFA, is Director of Business Development at the Federal Home Loan Bank of Seattle.