Overnight on a brokerage account - additional profitability from securities

Definition and basic concepts

The term overnight (from the English word overnight - to spend the night or night) is used to refer to short-term loans or deposits in the banking sector.

The loan is provided overnight to individuals and legal entities on the basis of an agreement; if the loan is received before weekends or non-working holidays, the repayment is postponed to the morning of the next working day.

The loan is used for urgent payments to suppliers (for example, in the absence of money on the balance sheet), but the banking institution charges a percentage for using the loan (the conditions are specified in the contract).

Overnight loan

In the Russian Federation, a loan is provided by the Central Bank to other financial institutions, the loan period does not exceed 1 business day. For example, when forecasting activities, a commercial bank discovers a shortage of funds in its accounts, but the balance is expected to be replenished the next day.

In this case, an application is submitted to the Central Bank, which transfers the required amount. The next day, the commercial structure receives the expected own funds, which are used to repay the debt and pay interest to the Central Bank.

Current rates

The country's main financial institution periodically changes loan rates, focusing on both the internal financial situation and global trends. For example, the maximum discount rate of 18% per annum was in effect from the end of 2014, but then gradually decreased.

Starting from June 22, 2021, the fee is 5.5% per annum, which reduces the costs of third-party commercial banks and has a positive effect on the economic situation within the country.

Deal for the night

The procedure is used to purchase securities through a repo mechanism, which provides for the repurchase of assets after a specified period of time.

The technology is a short-term loan secured by guarantees, which are securities pledged as collateral (according to legal canons, the operation is formalized as a purchase and sale procedure, and not a loan of funds). The buyback price is negotiated in advance by the partners; the procedure is common in the interbank sphere of activity.

Types of deposits

A legal entity can open a deposit account with an unlimited period of validity, in which the funds specified in the agreement are stored. The financial institution uses the money in accordance with the contract for interbank overnight, paying annual interest to the organization's account.

The amount of funds on the balance depends on the terms of the contract; a number of banks offer an automatic overnight deposit procedure, using the client’s money during non-working evening and night hours, and then returning the funds to the account the next morning.

Interest on free balance of securities

Using the service, you can receive additional income from your investment portfolio in the form of interest accrual on the free balance of securities.

In accordance with the Client Service Regulations of Otkritie Broker JSC, on behalf of the client, loan transactions can be concluded at a rate of 0.75% per annum of the loan amount, bringing additional income to the client. These transactions are concluded if there is a counter offer on the market.

Sources

• https://iklife.ru/investirovanie/overnajt-chto-ehto-takoe-prostymi-slovami.html
• https://Delen.ru/biznes-slovar/overnajt-chto-eto-takoe.html
• https://www.finam.ru/education/likbez/odnodnevnye-obligacii-chto-eto-i-kak-kupit-20200709-18260/
• https://open-broker.ru/ru/trading/services/coach-on-trading
• https://vse-dengy.ru/fondovyiy-ryinok/birzha/overnayt-na-brokerskom-schete.html
• https://advokat-malov.ru/grazhdanskoe-pravo/vidy-cennyh-bumag.html
• https://guide-investor.com/fondovyj-rynok/vidy-i-klassifikacija-cennyh-bumag/

Mechanism of action

The classic overnight algorithm is based on the temporary transfer of available funds for use by a financial structure (for example, by transferring from a deposit account to a separate balance).

For example, a legal entity has free capital in the amount of 10 million rubles, which after the end of the working day on Friday is transferred to a short-term deposit (overnight) with a return on Monday. The company does not need working capital during the weekend, and on Monday it receives the amount back with interest charged for use.

A number of Russian banks offer automatic transfer of available funds to an overnight account; the procedure is carried out after the end of the working day, and the return occurs 2-3 hours before the start of work.

Another option for the mechanism of action is to obtain a short-term loan for the purchase of components or raw materials (in the case when the receipt of funds for already sold products is delayed by 12-24 hours due to force majeure reasons), but such an algorithm is not available on the territory of the Russian Federation.

Conditions for placing a deposit

When opening a deposit account for overnight transactions, the following requirements are met:

1. An agreement is concluded between the parties, which specifies the rights and obligations and algorithms of actions in the event of force majeure circumstances.
2. The basic time for using client funds is 6 hours, but it is possible to increase the period to 24 hours (the duration is specified in the contract).
3. The agreement and the selected tariff determine the minimum balance of the deposit account (the minimum rate is set by the bank and is not centrally regulated).
4. The interest rate for the use of client deposit funds is set within the corridor established by the Central Bank, and also depends on the tariff.

Overnight Features

Short-term credit and debit products have a number of features:

1. The percentage is set by the bank within the corridor established by the Central Bank of the Russian Federation (the rule also applies to other states).
2. In case of delay in return, penalties are imposed on the debtor.
3. When working with short-term deposits, it should be taken into account that overnight transactions are not covered by insurance programs, which increases the risk of financial losses.
4. Banks set limits on the lower threshold of the amount that can be placed on the deposit balance. The conditions depend on the financial institution or the chosen tariff; some banks offer overnight in Russian rubles or foreign currencies.

Types of deals for one night

When working according to the overnight scheme, the following transactions are possible:

1. A loan provided by a government's central bank to commercial financial institutions.
2. Placing money in a separate deposit account that is used by the bank overnight. Loans and deposits are usually divided into products of standard and corporate types (they differ in terms of tariff).
3. A system of repo transactions in which the broker is issued securities that are held in the client's account. After carrying out speculative manipulations to make a profit, the broker returns the securities to the owner and pays part of the profit received. For example, Sberbank of Russia offers a similar scheme with an accrual of 2% per annum, but at the same time the financial structure takes a small commission.

How much can you earn?

For example, the overnight rate at the Sberbank broker is 2% per annum.

But this does not mean that having securities worth 100,000 rubles you will consistently receive 2 thousand a year on top. In addition to the main income from coupons, dividends and market value growth.

Several details will affect net earnings (besides the amount of assets).

Type of securities. Basically, only stocks are used for overnight trading. Other assets, bonds, funds (ETFs and mutual funds) do not participate in the process of generating new money for the owner.

Only liquid ones. For example, you have blue chips in your account (shares of Sberbank, Gazprom, Lukoil) and third-tier companies (Quadra, Plazmek, KMZ and other illiquid assets). Most likely, no one will need the latter as a loan.

Number of loans per year. In fact, you receive income only after providing overnight funds to the broker overnight. But how many such operations will there be in a year? In practice, the number of people willing to provide a one-day loan is an order of magnitude greater than the number of people in need of borrowed securities. At best, this is once every ten days. In fact, you can safely reduce it several times.

As a result, it may turn out that having the most liquid securities in your portfolio, you will be able to earn several times less than the broker’s stated rate.

And 2% annual overnight return turns into 0.1-0.2% (or less). And only for permitted assets.

A little. But as they say: “Even a tuft of wool from a black sheep.”

In principle, no movement is required from the investor when using overnight. The broker himself borrows the papers he needs. Returns with interest the next day.

Some pretty penny will drop. Over many years, a percentage of additional profitability will accumulate.

Advantages of overnight and possible earnings

Overnight has the following advantages:

1. The short commitment period allows the investor to make a profit within 12-24 hours. For example, money or securities placed in a deposit account remain idle during non-working hours, and using funds overnight allows you to earn a small percentage.
2. The reduced investment time interval reduces the risk of capital loss (the compulsory insurance program does not apply to transactions using overnight technology).
3. The overnight deposit account does not have an upper limit.
4. In the banking sector, a loan allows you to obtain funds for operating activities in case of waiting for the transfer of funds.

Earning money on overnight money is possible if you keep amounts of 1 million rubles or more in your accounts. It should be borne in mind that the interest rate on overnight deposits does not exceed 3%, so to receive monthly income in the range of 20-25 thousand rubles. it is necessary to use up to 10 million rubles daily.

According to statistical studies, overnight earnings do not exceed 1% per annum, so the scheme is unprofitable for individuals and small companies, but has become widespread in the interbank sphere of activity (due to the increased volumes of short-term loans).

The difference between documents confirming rights to a security and a security

According to the law, it is required to distinguish the document that confirms the rights to a security from the security itself.

These concepts are not identical. The holder of securities is required to have certificates that confirm ownership of the securities, but the certificate does not replace them.

The certificate is filled out according to the form and can be issued for one or two securities. The document must contain details in accordance with the law.

Disadvantages and risks of overnight

The disadvantages of short-term overnight transactions include:

1. Low interest rates, inferior to the conditions of the standard deposit tariff.
2. Introduction by financial institutions of additional conditions or fees that complicate the overnight procedure or reduce the profitability of transactions.
3. A lengthy process of drawing up agreements between a bank and a legal entity that provides its own funds at the disposal of the financial institution.
4. Introduction by banks of a minimum rate on a deposit account (at least 0.5 million rubles for ruble tariffs and from 15 thousand US dollars or Euros for foreign exchange rates, conditions may differ up or down).

When working under the overnight scheme on the brokerage market, a third-party company with which an agreement is concluded undertakes the obligation to sell and subsequently return the securities to the owner. The risk lies in the failure to fully fulfill contractual obligations by the brokerage firm.

In addition, we cannot exclude the possibility of a shortage in the securities market, due to which the broker will not be able to purchase and return a package of securities to the owner within the time period specified in the contract.

Free overnight

When concluding an agreement with a brokerage company, the terms of the contract include a clause allowing the broker to use securities placed on the client’s deposit. In this case, compensation to the owner is provided at a level of up to 0.02% per annum or the procedure is free.

In this case, the client needs to contact a representative of the brokerage company and clarify the terms of the agreement, and then block the service through a written statement or through a personal account (the algorithm depends on the broker).

From a foreign broker

When working with foreign brokerage companies, the client receives 50% of the result of the transaction (in which securities were involved). But when conducting transactions, there is no insurance program in place to ensure the safety of investor funds in the event of bankruptcy of the brokerage company.

Waiver of insurance is spelled out in American legislation on the protection of the rights of stock investors, which applies to brokerage transactions. The law provides for the mandatory payment by a broker of cash collateral for the securities used.

Placement of securities at a fixed interest rate

If you have a portfolio of liquid stocks, take advantage of the opportunity to increase the yield of these assets. Lend securities and receive additional income in the form of a fixed percentage of their value.

Terms of service

• The rate starts from 0.75% per annum of the initial value of the securities lent.
• The minimum cost of securities for placement is 5 million rubles.
• Other conditions are discussed with each client individually.

Submit your application

Interbank overnight

The overnight procedure between financial institutions is based on short-term lending from one bank to another. The first structure transfers a cash loan for 1 calendar day, receiving a profit in the form of interest for the service provided, and the recipient of the money solves the financial difficulties that have arisen (by losing a small part of the subsequent profit, which is given in the form of a commission).

Transaction volumes reach tens or hundreds of millions of rubles (in the Russian Federation such loans in foreign currency are not provided due to the risk of an overnight jump in the exchange rate), the annual rate starts from 2%.

Interbank relationships are regulated by central banks that regulate inflation processes. Centralized financial structures establish an interest rate corridor for overnight loans; going beyond the boundaries is not allowed. At the same time, central banks control the value of rates of other structures, preventing long-term deviation of the percentage from the one set by the regulator itself.

When calculating the interest rate corridor, central banks of a number of countries take into account the federal funds rates of the United States and other commonwealths (for example, the European Union). Interbank loans can be used to conduct speculative transactions, maintaining bank liquidity over the required period of time.

A number of financial institutions use credit amounts to complete settlements within the operating day (for example, when a shortage of funds is detected due to force majeure).

Current bank offers

In the Russian Federation, the overnight deposit service is offered by several financial institutions:

• Tinkoff Bank;
• Sberbank;
• Bank opening;
• VTB Bank.

Other banks (for example, Promsvyaz Bank or Alfa Bank) also offer overnight services, but the tariffs have a reduced percentage. All financial institutions recommend depositing an amount of at least 1 million rubles into the account, which allows you to receive additional daily income.

It should be borne in mind that a private entrepreneur, individual or organization cannot receive a loan through the overnight system. The service is provided only by the Central Bank of the Russian Federation for other participants in the banking market.

At Tinkoff Bank

The pioneer of providing services in the Russian financial market was Tinkoff Bank; the institution offers to place money on a short-term deposit with a profit. The client can use the service when storing more than 100 thousand rubles in the account; the interest rate and time for replenishing the deposit account depend on the tariff.

The financial institution offers an additional service for clients who keep more than 500 thousand rubles in their accounts, providing for automatic daily transfer of money overnight; in the morning the amount is returned to the expense balance.

Available tariff offers:

• Advanced, providing for the accrual of 1% per annum with the possibility of transferring funds overnight from 17-00 of the current day;
• Professional, offering payment of 2% per annum and acceptance of funds from 21-00 of the current day;
• The Premium package for the Professional tariff is characterized by increased profitability of up to 3% and automatic overnight management.

The bank ensures repayment of the loan and accrued profit until 4 am the next day, allowing the client to conduct basic activities using their own funds. For example, with an investment of 10 million rubles. Every day the client receives an additional monthly profit of up to 25 thousand rubles.

A separate checking account is used to store overnight funds; the client manages the balance and functions using an application installed on a smartphone.

In Sberbank

Sberbank offers clients to receive additional profit from the short-term placement of securities owned by a person or organization and placed in a brokerage account. The implemented OTS-REPO scheme involves the sale of securities by the bank at a price fixed at the end of the trading session.

Then the financial institution buys the assets at a price that takes into account the period of transfer of the securities to the buyer and the interest rate. The bank client receives an income of up to 2% per annum and pays a fee of 0.001% of the transaction volume to the financial institution.

OTS-REPO transactions are intended for individuals or corporate clients and are carried out by a financial institution on its own initiative; Sberbank does not guarantee the placement of the client’s assets.

Securities that are not encumbered with obligations are suitable for carrying out the transaction. The transaction mechanism is valid for 1 or several calendar days (until the start of the next business day with securities trading).

Bank opening

The financial institution offers clients overnight processing without creating a separate deposit account, which simplifies the operation of the mechanism. The minimum current account balance is RUB 2 million. or 100 thousand Euros for standard clients and from 5 million rubles. for corporate.

It is allowed to maintain an account in Russian rubles or foreign currency (US dollars and Euros). The overnight rate is updated monthly in accordance with the tariff policy of the Central Bank; the period for borrowing funds by Otkritie Bank under the overnight scheme does not exceed 24 hours.

Offer from VTB Bank

The deposit account allows you to deposit Russian rubles (from 1 million rubles) or American dollars (from 15 thousand $), the financial institution does not limit the amount on the balance sheet. Funds are raised for up to 1 business day; if the transaction is completed on Friday, the refund occurs on Monday morning.

The accrued interest is calculated depending on the transaction amount and the rates prevailing on the interbank market. Payment of profit is carried out simultaneously with the end of the attraction period.