What Are Funding Agreements

In the second half of the 2000s, U.S. life insurers accelerated their issuance of XFABN as a blue line in Figure 4. As with other short-term financing markets, such as commercial paper and asset-backed repo markets, the XFABN market collapsed in the summer of 2007, when institutional investors suddenly stopped expanding their XFABN. Under the terms of the contract, investors have received new securities – called spinoffs, which are displayed by the dotted red line in Figure 4 – that mature on a fixed date, usually about a year after the retraction notification. In a typical FABS structure, a life insurer sells a single financing contract to an EPS that funds the financing agreement by distributing smaller FABS parts to institutional investors. In addition, at least two types of FABS are designed for short-term investors, such as leading money market investment funds: Extendible Funding Agreement-backed Notes (XFABN) and Funding Agreement-backed commercial paper (FABCP). These securities have a much shorter term than the underlying financing agreement, which typically has a term of about ten years. XFABN often has an initial duration of 397 days, but each month gives investors the option to gradually extend the duration of their bonds by one month. Fabcp is a one-week to six-month fixed-term contract.3 Mutual of Omaha provides a platform for financing contractual products available to institutional investors. These financing agreements are marketed as conservative interest-rate products with regular income distributions and are offered on fixed or variable terms. The deposited funds are held as part of Omaha Life`s general life insurance account.

1. Another advantage is that financing agreements do not increase the leverage of insurers, as these are legal insurance contracts. Back to the text The FABS market collapsed during the financial crisis, when institutional investors withdrew from the structured product markets6. FABS emissions have recovered somewhat since then, and our latest estimates indicate that FABS unpaid debts reached about $75 billion in 2016:Q1. A financing contract product requires a lump sum investment paid to the seller, which then offers the buyer a fixed rate of return over a period of time, often with the LIBOR-based return, which has become the world`s most popular benchmark for short-term interest rates. This note describes the new data on securities covered by a financing contract (FABS) that are provided under the Enhanced Financial Accounts (EFA) initiative. As described in Holmquist and Perozek (2016), the U.S. financial accounts report the total amount of FABS`s outstanding assets at a quarterly rate. This EFA project expands financial account data by providing daily data to different types of FABS, which vary depending on duration and integrated optionality. The more detailed data presented in this EFA project provide a clearer picture of developments in this important financing market, including the start-up of a segment of the FABS market from the summer of 2007 (Foley-Fisher, Narajabad and Verani 2015).