Printable Version

Members feeling a squeeze on their net interest margins may find some relief with the Flipper, a new Federal Home Loan Bank of Boston advance that provides sub-LIBOR funding.

Simply put, the Flipper is a floating-rate advance that flips to a fixed-rate advance after an initial period of sub-LIBOR rates. A one-time (European) option allows FHLB Boston to cancel the advance at a predetermined date or convert it to a fixed rate for the remaining term to maturity. The initial floating rate — stated as a spread below LIBOR — is determined by the member. At the same time, this determines the fixed rate. In exchange for the benefit of sub-LIBOR funding during the floating-rate period, the advance includes a cancellation feature. If the advance is not cancelled after the lockout period, the Flipper’s one-time call structure eliminates the risk of cancellation for the full remaining fixed term.

For example, let’s assume a member takes down a Flipper with a five-year term and a one-year lockout period. FHLB Boston cannot cancel the advance during the lockout period. Also, suppose the member requests that the advance floats to three-month LIBOR less 100 basis points, adjusting on a quarterly basis (LIBOR less 150 or 200 basis points are also common structures.). If three-month LIBOR were at five percent when the advance disburses, the initial advance rate would be four percent for the first three months. The advance would continue to adjust to three-month LIBOR less 100 basis points on a quarterly basis for the remainder of the lockout period.

After a year, the Bank has a one-time option to either convert the advance to the predetermined fixed rate until final maturity or cancel the advance. The predetermined fixed rate in this case is 5.20 percent. After the lockout period, if interest rates have risen, it is likely we will cancel the advance. On the other hand, if rates have fallen since disbursement, it is likely that we will flip the advance. Although interest rates at the time of the flip option affect our decision, we will also consider the shape of the yield curve, the time remaining to final maturity, and the length of the lockout period, among other variables.

Members generally are attracted to the Flipper in a flat yield-curve environment as a macro, balance-sheet funding tool to lower their cost of funds and enhance their net interest margin for the life of the advance. While this results in a lower advance rate than could be achieved otherwise, it is important for the member to quantify the effects on their net interest margin. Flippers also require active management as interest rates change.

Contact your asset/liability or financial advisor for strategies you could employ in different interest-rate environments. As usage of this product increases, members should be able to quantify how changes in market rates would impact their net interest margin.

To learn more about the Flipper visit the Flipper product page, contact your relationship manager, or call the Money Desk at 800-357-3452.