October 14, 2016 is “E-Day” for U.S. corporate treasurers, as it is the effective date for Rule SEC 2a-7. Money market fund reform is nearly upon us, but this is not a late breaking story. After several years of industry deliberation, additional MMF reform was finally proposed and adopted in July 2014. It will transform the trading and risk management landscape for treasury practitioners and cash managers in profound and practical ways.
Yet, the immediate consequences will vary greatly depending on your department’s level of preparedness. Those treasury functions that have taken a more disciplined approach may have already taken on new liquidity portfolio diversification and optimization strategies, updated compliance guidelines, revised redemption scheduling to better synchronize with new intraday strike times, adopted new simplified tax accounting methodologies and deployed deeper exposure analytics for managing broader counterparty risks.
At the center of reform are prime institutional MMF VNAV implementations that have fundamentally changed many portal operations—essentially converting from a money-based system to a shares-based system—displaying current shares and current share prices throughout the portal to determine current balances.
Institutional prime MMFs will be required to maintain a variable (a.k.a. floating) net asset value (VNAV) for sales and redemptions based on the current market value of the securities in their portfolios rounded to the fourth decimal place (e.g., $1.0000), where they previously rounded to the second decimal place (e.g., $1.00).
Prime MMF investors should maintain diversified portfolios and use compliance, reporting and monitoring tools to avoid VNAV MMFs that tread too closely to liquidity minimums. Given this heightened liquidity scrutiny, and prime MMFs’ need to maintain their strategic (and yield) value for treasury practitioners, fund managers are extremely incentivized to stay above liquidity minimums where the possibility for fees and gates exist.
The importance of connectivity
Another vitally important requirement for optimal workflow is portal connectivity to other treasury functions. Institutional trading and investment risk management portals must be deeply integrated and automated with treasury management systems, banking, and corporate ERP. Understanding how to organize, display and integrate data across multiple treasury management systems and applications is critical to having successful efficient processes.
Tanya Strawn, senior manager, treasury, for Starbucks, sees her trading portal as an invaluable tool, due to its ability to create thorough, timely analysis. “It’s very helpful to be able to compare funds by category, asset size, yield, asset flows and liquidity, in addition to visibility to aggregated exposures for current and potential portfolios,” she said.
The following checklist will help you determine whether your treasury portal is prepared for MMF reform. Your portal should:
- Display VNAV share and EOD pricing.
- Show visibility to settlement strike times.
- Track the last known public price (including intraday), and show up-to-date cash positions based on that pricing.
- Compare VNAV MMF outflows and weekly and daily liquidity.
- Compare historical VNAV MMF outflows and weekly and daily liquidity in reports.
- Have compliance features that alert and/or block you from investing in VNAV MMFs with weekly liquidity below your established guideline.
- Have compliance features that alert you if a VNAV MMF in your portfolio has weekly liquidity below your established guideline.
- Generate gain/loss reports to streamline the simplified tax accounting method for VNAV MMF reporting.
- Enable you to generate what-if scenarios that show performance and exposure analytics to help generate optimal portfolios.
Laurie DeGraaf, senior manager, treasury technology for Western Union, welcomes the reform tax accounting enhancements of her trading portal. “VNAV tax and financial reporting was my biggest MMF reform issue,” she said. “The simplified tax accounting rules and gain/loss report alleviated that concern.”
By performing some basic analyses made easier by technological advances, there are opportunities to increase yield while maintaining, and in some cases, decreasing risk. Guided with a clear understanding of a company’s investment objectives and risk tolerance, treasury practitioners can leverage technology to help analyze risk, liquidity and yield factors and construct optimal portfolios. In most cases, those optimal portfolios will include institutional prime money market funds.
Thomas C. Knight, CCM, is executive vice president and treasurer for ICD.