Several topics came up in International Treasurer’s editorial meeting this week, including what the impact will be of newly proposed money market fund rules from the Securities and Exchange Commission. Also we’ll go over options and the idea of a “rent an option,” which came up at a recent NeuGroup FX Managers’ Peer Group (FXMPG) meeting. Finally, we’ll take a look at how new swap futures carry benefits, whether you’re exempt or not.
New SEC MMF Rule Implications.
The SEC has voted in favor of tightening rules for money-market funds, proposing that “prime” funds, which cater to large institutional investors, do away with the constant $1 share price regime it currently uses. This would allow the fund prices to float like other mutual funds. In 2010, prime funds were told to invest in short-term corporate debt. IT will take a look at VNAV products, including DB Advisors’ fund it has offered since 2011. Deutsche say VNAV MMFs are identical to CNAV in their investment policy, liquidity features and average maturity parameters, which provide support for a “cash or cash equivalent” classification.
Rent an option.
Times of high volatility highlight over- or under-hedging in financial statements which consequently shines a light on the underlying exposure analytics. This increases the premium on accurate exposure identification and forecasting and any and all tools and methods to improve performance on this frequently cited challenge are welcome.
While some in the FXMPG have found a way of leveraging their ERPs to produce such reporting, others find that vendors like FiREapps get them there faster. Once a more reliable forecast is available, it’s easier to justify an increase in the hedge ratio, and if so, one consideration is to make the additional hedge layers more flexible to take advantage of market conditions.
For those who encounter barriers to securing a premium budget, the “rent an option” approach may prove more palatable. What should be clear is that a straight-up forward-based hedge program may not always buffer market volatility as much as predicted.
New Swap Futures May Provide Hedge Accounting.
Although exempted from clearing, corporates may want to monitor the upcoming swap clearing deadline’s impact on new swap futures products. That’s because if they gain liquidity, as anticipated, they may provide a more efficient hedging tool with many of the benefits of over-the-counter (OTC) swaps, including hedge accounting.
IT will take a look at the June 10 deadline, which requires upwards of 300 US investment managers to begin clearing swaps, on top of dealers who began clearing in March. It has been eagerly awaited by exchanges that have introduced swap futures products, since they expect the complexity and uncertainty of the new clearing paradigm to prompt market participants to reconsider the established and well-understood futures market.