The issuers of products that money market funds (MMFs) typically purchase will feel the impact of the new MMF regulations by the Securities and Exchange Commission (SEC) nearly as much as the funds themselves. In a recent AFP roundtable in Seattle, the treasurer of a home loan bank expressed concern that fewer funds will mean the purchase of fewer discount notes.
Of greater concern to treasurers is issuing commercial paper, which is a staple of debt and a big investment for MMFs. Bankers at the roundtable said the new MMF rules would not immediately impact commercial paper, but admitted they would have a negative impact over the long term. “Big issuers may have to pay more,” one practitioner predicted.
In the future, companies may purchase commercial paper directly from issuers instead. “We’re already seeing companies do their own counterparty risk analysis on financial institutions,” said Craig Martin, executive director of the Corporate Treasurers Council. Martin has already seen companies bring investment in-house and invest in high-grade, short-term corporate bonds.
From a cost/benefit standpoint, that makes sense. “On a relative basis, you’re paying hedge fund fees for MMFs,” said one roundtable participant.
“If I were running a treasurer’s office, I’d look at investing directly in the commercial paper of issuers like Chinese banks,” one banker suggested.
With money market funds less appealing, treasurers will need to change their mindset, roundtable participants said. “We have become a nation of idle cash sitting in the bank,” said one practitioner.
The problem, practitioners and bankers agreed, is the existing mindset that the board will not tolerate any losses. While corporate treasury groups are earning nothing on their investments, organizations like endowments are earning much more with relatively little risk. “The mindset of treasury professionals needs to change beyond just supporting security and liquidity,” he said. “If you’re not buying back shares or paying dividends, treasury should become more of an investment arm.”
A few companies whose boards and treasurers are tired of fixating on safety and liquidity are doing something about it. On top of paying dividends and buying back stocks, they’re creating tiered portfolios with operational cash, short-term cash, and long-term cash that’s often managed by professional managers.
According to AFP’s 2014 Strategic Role of Treasury Survey, cash and liquidity management are the top strategic expectations boards have of treasury professionals (69 percent). “Cash and liquidity are corporate assets,” noted one survey participant. “We need to manage them as such.”
Still, as one AFP Treasury Advisory Group participant noted: “The bottom line is that all of these trends lead us to concentration of funds, lack of liquidity, and higher costs.”
- Get tax and accounting involved. For many companies, MMF reform has stayed in the halls of treasury. It’s time to get tax and accounting involved and bring them up to date so they know it applies to them. “We should have immediately gotten them into the discussion,” said one treasurer. “At least we should introduce the topic, even though there are a lot of unknowns.”
- Review policies, not just in treasury. MMF reform will not only affect investment policies; it will affect tax and accounting policies too. These other groups may have to do things to update their own policies, meaning they’ll need lead time as well.
- Challenge the mindset. Separate true liquidity from cash that can be invested further out and adjust for that in the investment policy. Provide stakeholders with a route away from idle cash, and retain outside managers to manage it. Give the cash back, or begin to take advantage of investment opportunities beyond zero return.
- If floating NAV MMFs get reclassified into short-term securities, you will need to apply FAS 115-2 and disclose impaired securities.
- Update your Sarbanes-Oxley Act documentation to reflect any changes in processes.
- Update investment policies when necessary. In 2008, many companies tightened their policies—perhaps too much. “The wisdom of shoring things up in 2008 has worked to companies’ detriment,” said Tyler Haws of Clearwater Analytics. “Those who kept it broader are in better shape.” That policy may include notification if a fund level dips below 30 percent, liquid assets, or prohibition of buying funds below a certain 99.99 percent level.
This article is excerpted from Executive Perspectives: Strategic Insight into Money Market Funds Reform.