Notes From the Funding Desk: Re-Introducing the Putable Floating-to-Fixed Rate Advance (A370)

July 12, 2021

As we continue to add value to your business and transition away from LIBOR, we are pleased to announce a revised advance for our members linked to the Federal Funds effective rate. Take advantage of extremely low rates during the initial floating rate period.

The Putable Floating-to-Fixed Rate advance (A370) starts with a floating period which converts to a fixed-rate after a period of time determined by the member. The Federal Home Loan Bank of Chicago (FHLBank Chicago) has the option to terminate the funding prior to maturity after the lock-out date. Members may customize this advance to help optimize costs and manage their liability portfolio.

Advance Structure

Floating-to-Fixed
The A370 advance interest rate is broken into two periods, each as determined by the borrowing member at inception. In the first period, the interest rate will float based off the Federal Funds effective rate published by the Federal Reserve Board of Governors. In other words, the advance rate will reset daily to the Federal Funds effective rate. The interest rate will change to a fixed-rate in the second period and will remain fixed through the remaining life of the borrowing. Members may choose to pay a spread over the floating-rate during the first period in order to lower the fixed-rate during the second period.

Putable Option(s)
Proceeds of this advance are available on the day of execution and due back, in full, on the maturity date, or on such date that FHLBank Chicago exercises its put option to terminate the funding. This embedded put option provides flexibility to FHLBank Chicago and contributes to a rate reduction relative to a standard fixed-rate advance. Members may choose to embed a one-time option, referred to as European, or quarterly options known as Bermudan. The advance may not be put until after a designated lock-out period after which the fixed rate period, or second period, of the advance will start.

Example Advance
Consider a 3-year Bermudan putable advance broken into a 1-year floating-rate period and a 2-year fixed-rate period executed in July 2020. This A370 advance would be referred to as a 3-year no put 1-year Bermudan Floating-to-Fixed advance. Members would pay the daily resetting Federal Funds effective rate with no additional spread for 1-year (recently between 6-10 basis points), and then a fixed-rate for 2 years thereafter (currently priced at 49 basis points). With the Bermudan put option, FHLBank Chicago would have the option to terminate the funding after 1 year and quarterly thereafter through maturity.

The illustration below assumes this advance was executed last year in July 2020:

notes-july 12-1

Risk and Rewards

The A370 advance helps members achieve funding costs at or near the Federal Funds effective rate for an initial period of time. As a result, members can capitalize in today’s low interest rate environment. After the initial floating-rate period, the interest rate will reset to a fixed-rate that may or may not be higher than the Federal Funds effective rate at such future point in time. Members risk paying a higher fixed-rate if interest rates fall or remain unchanged. FHLBank Chicago will retain the option to terminate the funding following the initial floating rate and lock-out period. Therefore, members risk the termination of the cheaper-than-market funding, which may occur if FHLBank Chicago’s cost of funds rises above the fixed-rate advance at a future point after the lock-out period.

How to Transact

To execute this advance, you must call the Member Transaction Desk at 855.345.2244, option 1.

Questions?

Please reach out to your Sales Director with any questions.

Contact your Sales Director for more information.

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