Brokered CDs

[Admin/YBB]

With rising interest rates, certificates of deposit (CDs) have become popular. The CDs bought at brokers are called BROKERED CDs. These offer great convenience and flexibility – the CDs from multiple banks can be bought from the same brokerage account and each brokered CD will typically have a separate FDIC coverage within the rules. Longer-term ( > 10 years) brokered CDs are also available. See below for additional details on fees, float, FDIC coverage, selling/redeeming before maturity.

The 3rd party brokerage platforms (Fido, Schwab, etc) charge banks 0.25-0.65% PLATFORM FEES for NEW ISSUE CDs that are listed on their platforms. The CD rates quoted are NET of any platform fees that the offering banks have to pay, and the buyers are not charged any additional fees/commissions (but keep in mind that the CDs originally have higher GROSS rates, and you get the lower net rates). The brokers may also be using the FLOAT on your money that is taken from your account soon after your order entry but that is well before the ISSUE date of the CDs. Brokers are not required to disclose these internal or indirect “fees/costs” to retail CD buyers.

Many of the brokered CDs may be from lesser-known and/or less financially sound banks; several CDs may be from foreign banks. This may be why they offer brokered CDs at higher than MARKET rates (even after absorbing the brokerage platform fees). The FDIC is aware of this issue and watches if some banks are consistently among those offering top interest rates. Be sure to check that the brokered CDs are covered by the FDIC insurance (primary for the buyer, not secondary through the broker) as some may not be (major brokers such as Fidelity and Schwab sell only the FDIC insured CDs and this is clearly stated). For foreign banks, the FDIC coverage may be for their specific US branches, so that creates additional confusion and risks.

Brokered CDs differ in one important respect from BANK CDs (bought directly from banks). Brokered CDs FLUCTUATE daily in value according to the current bid-ask in the SECONDARY market that depend on interest rates and other factors. The new buyers of brokered CDs are bothered/puzzled by this mark-to-market practice. One will get the current bid if one sells early (retail buyers sell at bid, buy at ask). There may also be nominal FEES for buying or selling CDs in the secondary market. The secondary market for CDs is not very liquid and selling brokered CDs early may incur large losses. However, they will pay full/promised amount (principal plus interest) on MATURITY. On the other hand, bank CDs have defined interest PENALTIES for early withdrawals (typically 3–6-month interest) but don't fluctuate daily in value.

Another important point is that for most investment vehicles (stocks, ETFs, CEFs, options), the payments are due by the SETTLEMENT dates. But that is not so for new issue CDs, so for those, have money ready/available on (or soon after) the order dates. While the broker may claim to provide “commission-free” purchase for new issue CDs, they are using the FLOAT on your money from the time the money leaves your account to when the CD is finally issued; for brokers, these floats can be significant in the aggregate. If you are moving money across different investment vehicles, there may be mismatches in the cash flows, and you may be charged margin interest if you have margin account; if you have cash/non-margin account, then the orders may be cancelled or trade violation warnings may be issued.

Edit/Add, 4/1/24. FDIC Limits Insurance with Tricks
ybbpersonalfinance.proboards.com/post/1420/thread

Bankrate.com www.bankrate.com/banking/cds/what-are-brokered-cds/
Investopedia www.investopedia.com/terms/b/brokered-cd.asp
Fidelity www.fidelity.com/fixed-income-bonds/cds
Schwab www.schwab.com/fixed-income/certificates-deposit
FDIC www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html
FINRA www.finra.org/investors/learn-to-invest/types-investments/bank-products/certificates-deposit-cds
DepositAccounts (Local CD Rates) www.depositaccounts.com/banks/rates-map/

[Admin/YBB]

MFO post on CDs Related To POD/TOD Designation, Survivor/Death-Put Options, Limited Secondary Market
www.mutualfundobserver.com/discuss/discussion/comment/156391/#Comment_156391

yogibearbull
9:30AM edited 9:33AM Flag

Just keep in mind that POD/TOD is an easy estate TRANSFER mechanism that doesn't cost anything (if the designation allowed).

CD survivor/death-put option is an estate PROTECTION feature that will cost as lower interest rate (if allowed). There are also rules for triggering the feature. Its value may be if the brokered CD has to be cashed early.

General www.investopedia.com/terms/d/deathput.asp
CDs www.pipersandler.com/pdf/04-1730_survivor'soptionsecurities.pdf
Fido CDs, pg 10-11, www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/cddisclosure.pdf
While there, also read about the SECONDARY MARKET for CDs - really, illiquid and on best efforts basis.

[Admin/YBB]

Brokered CDs (MFO Post)
www.mutualfundobserver.com/discuss/discussion/comment/174345/#Comment_174345

@crash, brokered CDs are expensive for the banks to raise money. They have to pay brokerage platform fees to be listed (25-50 bps), and then offer competitive rates. But banks can raise deposit money through this channel quickly, without tying up their branch staff for days/weeks. Despite high costs to the banks, they find this a lucrative channel so much so that banks in trouble keep tapping this channel way past their time. The Fed knows this too, so keeps an eye on banks that top the lists of brokered CDs repeatedly. Big banks are mostly on/off those Top CD lists, or offer unusual maturities so as not to be on the top CD lists - ever wonder what's the big deal about 11-mo or 14-mo CD?

Anyway, the good news is that you as a consumer don't have to pay any extra fees for brokered CDs. Just make sure that they are FDIC insured - Fido, Schwab, etc offer only FDIC insured CDs, but small brokerages may also offer higher rate non-FDIC insured CDs (not worth the headache). You also have to get used to their fluctuating values, but they will pay 100% on maturity (principal & interest).

Keep in mind that brokered CDs aren't very liquid, so if there is even a small chance that you may need money before maturity, stick to very liquid T-Bills/Notes.