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16th September
2021
written by Tellus

Funding agreement products can be offered worldwide and by many types of issuers. They usually do not require registration and often have a higher return than MONEY MARKET funds. Some products may be linked to selling options that allow an investor to terminate the contract after a certain period of time. As might be expected, financing arrangements are the most popular among those who wish to use the products for capital maintenance and not for growth in an investment portfolio. The maximum amount of funding (the “maximum amount of funding” that the IESO can pay to the recipient under the funding agreement) is the amount set on the coverage of the funding agreement. Financing agreements are essentially a way for investors to make money without exposing themselves to significant risk. They look like CDs and pensions. However, since financing agreements are often low-risk and are designed as a constant and secure investment, they generally generate only modest returns. This is the reason why they are often used to preserve wealth rather than trying to enlarge it.

1. Another advantage is that financing agreements do not increase the standard leverage measures of insurers, since they are statutory insurance contracts. Back to text 8 The movement of life insurers to FHLBs is consistent with a broader transfer of funding from shadow banking to the FHLB system. See Acharya, Afonso and Kovner (2013). Back to text In the second half of the 2000s, U.S. life insurers accelerated their exit from XFABN, as shown in the blue line in Figure 4. And as with other short-term funding markets, such as the asset-backed and repo-backed commercial paper markets, XFABN`s market began to collapse in the summer of 2007, when institutional investors suddenly stopped extending their XFABN. In accordance with the contractual terms, investors received, after the declaration of withdrawal, new securities, called spinoffs, represented by the dotted red line in Figure 4 – maturing on a fixed date, usually about a year after the notification of the resignation. .

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