Today, the DTC Brokered CD marketplace is approximately $1 trillion. That is more than the total of all FHLB advances outstanding which, as of March 31, 2019, stood at just over $670 billion. Last year was a reasonably big year for credit unions issuing DTC Share Certificates, with issuance of approximately $2 billion. In comparison, FDIC insured banks issued approximately 100 times that amount in 2018.
Why do banks issue so much more than credit unions? First and foremost, banks have been utilizing DTC Brokered CDs for over 30 years. And, the bank market is incredibly mature and robust. Banks can issue from 1 month in duration all the way out to 10-15 years in duration. FDIC insured product has been approved by almost every broker dealer in the United States. Customers for bank paper in the form of FDIC insured brokered CDs range from retail accounts. Banks can issue CDs in bullet, callable and structured form.
Unlike credit unions, there is no such thing as a low-income designation for banks. Banks must maintain well-capitalized status, but that is all they need to issue brokered CDs. Many banks issue brokered CDs to mitigate interest rate risk. Brokered CDs can offer a particularly good hedge because they can be issued in almost any maturity imaginable.
Why do so few credit unions issue DTC Share Certificates? In our experience, many credit unions simply do not know they can issue DTC Share Certificates. In fact, many credit unions have never heard of the marketplace. A surprisingly large number of the credit unions we speak to about DTC Share Certificates are hearing the story for the very first time. Once a credit union understands how to utilize the program effectively, it can easily build the product into its liability policy and deploy the program as a valuable component of its funding mix.
Funding a balance sheet can be a challenge. We feel that every low-income designated credit union should consider whether it should gain access to DTC Share Certificates. Why not have as many sources of liquidity as possible? Of course, we always encourage credit unions to do proper due diligence on the provider(s) they choose. A responsible policy around DTC Share Certificates should complement a credit union’s broader liability strategy. And, a credit union should performing test trades regularly to improve policies and procedures. As with any new product, it might not be the wisest move for a credit union to put on a big block of liquidity on its first DTC Share Certificate issuance.
Getting setup for DTC Share Certificates is surprisingly easy. There is a standard set of documents to be executed at the onset of the program. And, a credit union will need to get setup in the DTC system. All in all, the process is fairly painless to complete and a chosen service provider will help. There is no cost to add this program to a credit union’s liability mix. A credit union’s chosen underwriter or broker dealer is compensated with a spread, and on a trade by trade basis. Typically, brokers quoting a bid for liquidity will do so at an all-in rate, which includes their margin. The all-in rate is the credit union issuer’s all-in cost to secure that funding. The quoted coupon represents the amount that the downstream purchaser receives at each coupon date during the instrument’s term.
Issuing credit unions have no responsibility to manage the downstream NCUA insurance. Instead, the underwriter’s selling group manages that function. An issuing credit union needs only to book a single Master Share Certificate on its core processing system. A single aggregate coupon payment is made to DTC at the interest payment frequency. A credit union can also choose whether to wire or ACH debit itd interest payments to DTC. This streamlined process for interest payments is one of a whole host of operational efficiencies embedded in DTC Share Certificates.
Finally, we encourage all credit unions to carefully identify the source of funds from a liquidity service provider. Does your provider only face other depository institutions? Does your provider mainly focus on banks? Does credit union issuance represent only a small percentage of their overall business? How long has your provider been in the business of underwriting for credit unions?
Your credit unions should not be afraid to ask these questions and more as you explore the DTC Share Certificate marketplace. All low-income designated credit unions should consider having DTC Share Certificates in their arsenal of liquidity solutions. It’s the largest liquidity source available to depository institutions and it is a surprisingly straightforward and simple process. If you have questions or interest.
Finally, please do not hesitate to reach out to us. We can help!