From the article, “Funding Corporations Are Major Buyers of Open Market Paper: Q3 2005“, the reader might infer that everybody understands what ‘Funding Corporations’ are, and for that I apologize.

If you never heard of ‘funding corporations’, don’t feel embarrassed. I worked for forty years in international capital markets, and I never heard of them either.

It turns out that the term ‘funding corporations’ is Federal Reserve Geek Speak: a term invented to cover a mixed bag of sources of funds that appear in Flow of Funds Accounts Table F131.

There is no color-coded version of Table F131 on this site, but the data can be found online at the Federal Reserve: Table F131 and Table L131.

Official Definition of ‘Funding Corporations’

This is the official Federal Reserve definition of the term ‘Funding Corporations’:

Table F.131 Funding Corporations

The funding corporation sector comprises four types of financial institutions and entities:

1. subsidiaries of foreign banks that raise funds in the U.S. capital markets and transfer the proceeds to foreign banking offices in the U.S.;

2. subsidiaries of foreign bank and nonbank financial firms that raise funds in the U.S. and transfer them to the parent company abroad;

3. nonbank financial holding companies; and

4. custodial accounts for reinvested collateral associated with securities-lending operations.

The assets of the subsidiaries and the holding companies are their investments in affiliates.

Funding for these assets is obtained from the commercial paper market, in which the funding corporations are major issuers.

Proceeds that are transferred to parent institutions abroad are reported as foreign direct investment (FDI); by convention, FDI is reported as an asset of the parent and a liability of the subsidiary.

In the case of funding corporations, therefore, the foreign parents’ FDI assets and the subsidiaries’ FDI liabilities have negative balances (because the parents owe the subsidiaries).

Custodial accounts are bookkeeping entities established to hold cash collateral put up by security dealers to back securities they borrow to cover short sales and delivery failures; the collateral is returned to the dealers when the borrowed securities are returned.

While it is being held in custody, the collateral is invested in money market mutual fund shares, commercial paper, and corporate bonds.

Figures for commercial paper issuance by funding corporations are derived residually by subtracting the amounts owed by other financial issuers from total financial commercial paper outstanding shown in the daily “Commercial Paper” release published by the Federal Reserve Board.

Data on investment by funding corporations in foreign banking office subsidiaries are also taken from the daily release.

Through 1997:Q2, information on investment by funding corporations in their security broker and dealer affiliates was based on data from the Federal Reserve Bank of New York’s commercial paper release; data are now estimated by the Flow of Funds Section on the basis of the previous relationship between commercial paper issuance by funding corporations reported in that release and net corporate bond issuance by investment banks.

Estimates of reinvested collateral held in custodial accounts are based on data on securities borrowed and lent reported by brokers and dealers to the Securities and Exchange Commission.

— Guide to the Flow of Funds Accounts, Volume 1

More on ‘Funding Corporations’, Coming Soon on this Blog

Since ‘funding corporations’ move hundreds of billions of dollars and are major players in the market for commercial paper and bankers acceptances, we should really try to understand what they are and how they operate if we are to apply the Motivation Axiom of Capital Flow Analysis.

As you will note from the official definition, one type of ‘funding corporation’ is not a corporation at all, but a ‘custodial account’ related to securities lending and borrowing operations. It turns out that this non-corporate ‘funding corporation’ is responsible for the major share of the flow of funds in this sector.

I will have more to say about this in a future article.

This entry was posted on Thursday, February 9th, 2006 at 7:48 am and is filed under Treasuries, Open Market. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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