Title: Negotiable Certificate of Deposit (NCD) — What It Is, How It Works, and Practical Steps to Invest
Key takeaways
– A negotiable certificate of deposit (NCD), often called a jumbo CD, is a large-denomination, short-term time deposit that can usually be sold in a secondary market before maturity but cannot be cashed in to the issuing bank early.
– Typical face values start at $100,000 (often $1 million or more), maturities generally run from about two weeks to one year, and interest payments vary (periodic, at maturity, or purchased at a discount).
– NCDs are FDIC-insured up to $250,000 per depositor, per insured bank; amounts above that are exposed to issuer credit risk.
– They are most commonly used by institutions and high-net-worth investors who need a liquid, low-risk parking place for cash and who can transact in large blocks.
What is an NCD?
– Definition: A negotiable certificate of deposit is a time deposit issued by a bank with a large face value that is transferable (negotiable) in the secondary market. Unlike retail CDs, NCDs are typically bought and sold between institutional investors or through dealers and brokers.
– Denomination and buyers: Minimum face value is commonly $100,000, but most NCDs trade in $1 million blocks and are held by corporations, money market funds, institutional cash managers, insurance companies, and wealthy individuals.
– Interest and maturity: Terms are short—commonly from two weeks up to one year. Interest can be paid periodically, at maturity, or the NCD may be issued at a discount (zero-coupon style). Rates are negotiable and driven by money-market conditions.
History (brief)
– NCDs were introduced in 1961 by First National City Bank of New York (now Citibank) to help banks raise short-term funds and to create a secondary market for deposit instruments. Adoption grew rapidly through the 1960s and 1970s as investors sought liquid, short-term alternatives to checking and other non-interest-bearing balances.
How NCDs differ from other short-term instruments
– Versus retail CDs: Much larger minimums and negotiability; retail CDs often cannot be sold and have penalties for early withdrawal.
– Versus Treasury bills: T-bills are backed by U.S. government credit and thus typically are considered lower credit risk; NCDs generally pay higher yields than T-bills to reflect that relative credit risk.
– Versus commercial paper: Commercial paper is unsecured corporate debt; NCDs are bank deposits (insured up to limits) and are often considered less risky than corporate paper, depending on coverage and amounts.
FDIC/NCUA insurance and limits
– FDIC insurance: NCDs issued by FDIC-insured banks are covered up to $250,000 per depositor, per insured bank, for each account ownership category (the permanent increase from $100,000 took effect after Dodd–Frank). Amounts above $250,000 are uninsured and expose the holder to the bank’s credit risk.
– Credit unions: Similar deposit instruments issued by credit unions may be insured by the NCUA up to applicable limits.
– Practical implication: Large investors often subdivide cash across multiple banks or account ownership categories to obtain full federal protection.
Advantages of NCDs
– Liquidity: Negotiability allows sale on the secondary market, providing liquidity that standard retail CDs may lack.
– Short-term and stable: Terms are short and interest predictable, suitable for cash management.
– Higher yield than Treasuries: Because they carry bank credit risk, yields are typically higher than comparable-maturity Treasury bills.
– Low operational complexity for institutions: Can be a straightforward way to earn yield on large idle balances.
Disadvantages and risks
– Insurance limit: FDIC coverage is only up to $250,000 per depositor per bank — many NCD sizes exceed that, creating uninsured exposure.
– Credit risk beyond insurance: Uninsured holdings are subject to issuer default or resolution risk.
– Interest-rate/call risk: Most NCDs are non-callable, but if callable provisions exist the issuer may redeem when rates fall, creating reinvestment risk.
– Secondary market risk: While typically liquid, the secondary market can widen spreads or become thin in stress, making sale costly or slow.
– Minimum investment: High denomination excludes most retail investors.
Where and how NCDs are traded/purchased
– Primary market: Issued by banks and sold to institutional buyers and through dealer networks at issuance.
– Secondary market: Bought and sold among dealers, brokers, and institutional investors; access is usually through broker-dealers, banks’ wholesale desks, and institutional money-market intermediaries.
– Retail access: Some wealth-management arms, private banks, and certain brokers can facilitate participation for high-net-worth clients, but minimums and liquidity constraints still apply.
Typical terms and features
– Maturities: Typically from about two weeks to one year (though some issuances may vary).
– Denominations: Minimum commonly $100,000; $1 million blocks are common.
– Interest payment: May be periodic (e.g., semiannual), at maturity, or issued at a discount.
– Callability: Most are non-callable; verify prospectus/issue terms as callable issues create extra risk.
Practical steps to evaluate and invest in NCDs
1. Define your objectives and constraints
– Purpose (liquidity, short-term parking, yield).
– Time horizon (when you’ll need the cash).
– Risk tolerance for uninsured amounts.
2. Determine the investable amount and FDIC coverage plan
– If your total cash exceeds $250,000 per bank, decide whether to limit exposure per bank or spread funds across multiple banks to obtain full FDIC protection.
– Consider using account ownership categories (individual, joint, trust) where appropriate and legally justified.
3. Check issuer and issue details
– Confirm issuing bank is FDIC-insured.
– Review the offering terms: maturity, yield, interest payment schedule, whether it’s callable, and denomination.
– Obtain dealer offering documents or confirmations.
4. Compare yields and market prices
– Shop rates across banks and dealers; yields are negotiable for large blocks.
– Compare NCD yields to comparable-maturity Treasury bills, commercial paper, and money-market alternatives to assess value.
5. Use an appropriate execution channel
– Institutional investors: use dealer desks, banks’ wholesale channels, or institutional brokers.
– High-net-worth retail clients: private banks or brokers that can source NCDs and execute secondary-market trades.
– Confirm transaction costs, broker/dealer fees, and settlement procedures.
6. Consider laddering or splitting deposits
– Ladder maturities to control reinvestment risk and maintain liquidity.
– Split blocks among different institutions to keep FDIC insurance intact if needed.
7. Plan exit/liquidity
– If you may need early liquidity, verify secondary-market liquidity for the specific issue and potential bid–ask spreads.
– Understand settlement and transfer mechanics (book-entry custodial arrangements are typical).
8. Tax and reporting considerations
– Interest income from NCDs is taxable as ordinary income at federal and state levels (state tax treatment can vary). Confirm with tax counsel or your accountant.
– Ensure custody and reporting align with institutional or personal tax/reporting needs.
Example scenarios
– Institutional cash manager: A corporation with $10 million of short-term cash can buy multiple NCDs from different banks at competitive negotiated yields, ladder maturities every two months, and maintain liquidity via secondary markets.
– High-net-worth investor with $2 million: Split into eight $250,000 deposits at different FDIC-insured banks (or use trust/joint categories where appropriate), purchase short-term NCDs with staggered maturities to maximize insured amounts while earning higher yields than money-market funds.
Checklist before you buy an NCD
– Does the issuing bank have FDIC insurance? (Check FDIC BankFind or the bank’s disclosures.)
– Is the face amount within your FDIC-insured capacity per bank?
– Are the maturity, yield, and payment terms acceptable?
– Is the issue callable? If so, under what terms?
– How liquid is the particular NCD on the secondary market?
– What fees/commissions apply and how will trades be settled and reported?
– Have you compared yields to Treasuries and other money-market instruments?
The bottom line
An NCD is a short-term, large-denomination, negotiable bank deposit used primarily by institutions and large investors as a liquid, relatively low-risk cash management tool. It typically offers higher yields than Treasuries but only offers FDIC insurance up to $250,000 per depositor per bank; amounts above that are exposed to issuer risk. Investors should weigh liquidity needs, FDIC coverage, issuer credit, and market conditions and use broker/dealer channels or private-bank relationships to source and trade NCDs.
Sources and further reading
– Investopedia. “Negotiable Certificate of Deposit (NCD).” https://www.investopedia.com/terms/n/ncd.asp
– Federal Deposit Insurance Corporation. “Deposit Insurance at a Glance.” https://www.fdic.gov/resources/deposit-insurance/
– FDIC. “Basic FDIC Insurance Coverage Permanently Increased to $250,000 per Depositor.” https://www.fdic.gov/resources/deposit-insurance/faq/basic-fdic-insurance-coverage-increased.html
– TreasuryDirect. “Treasury Bills.” https://www.treasurydirect.gov/indiv/research/indepth/tbills/res_tbills.htm
– Office of the Comptroller of the Currency. “The Negotiable CD: National Bank Innovation in the 1960s.” (Historical background)
If you’d like, I can:
– Help you compare current NCD yields versus comparable-maturity T-bills and commercial paper (I’ll need current market rates).
– Draft an FDIC-insurance plan for a specific cash amount (to maximize coverage across institutions).
– Provide sample trade steps and wording to request an NCD quote from a broker.