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Just What Are ‘Funding Corporations’?

Posted By John Schroy On 9th February 2006 @ 07:48 In Treasuries, Open Market | Comments Disabled

From the article, “[1] 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 [2] F131 and Table [3] 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:

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.;

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

nonbank financial holding companies; and

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 [4] 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.

Tags: [5] cash collateral, [6] funding corporations, [7] money market funds, [8] securities lending, [9] short selling

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URL to article: http://capital-flow-analysis.com/capital-flow-watch/just-what-are-funding-corporations.html

URLs in this post:
[1] Funding Corporations Are Major Buyers of Open Market Paper: Q3 2005: http://capital-flow-analysis.info/capital-flow-watch/archives/67
[2] F131: http://www.federalreserve.gov/releases/z1/current/accessible/f131.htm
[3] L131: http://www.federalreserve.gov/releases/z1/current/accessible/l131.htm
[4] Motivation Axiom: http://capital-flow-analysis.info/investment-tutorial/lesson_2.html
[5] cash collateral: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=cash-collateral
[6] funding corporations: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=funding-corporations
[7] money market funds: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=money-market-funds
[8] securities lending: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=securities-lending
[9] short selling: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=short-selling
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