A quick look at what’s on International Treasurer’s radar screen this week.
This week’s International Treasurer weekly editorial meeting brought up several topics we’ll explore over the coming weeks. These include a look at the possible collateral consequences of US prolonged government shutdown over the debt ceiling, likely ready to happen within the next week; more about how treasurers feel about coming changes to money market funds; and a look at the next generation of in-house banks.
Default and collateral risk
Starting October 17, the US might stop paying interest on its debt. And while damage to the lending markets from a possible US government default is hard to estimate in advance – or even when it happens – due to the nature of Treasury collateral, it could be material. We’ll take a look at some strategies to hedge that risk, if it comes to that. There are still two weeks left before the government may find itself short of funds, and even beyond that, RBC Capital Markets estimates that Treasury can stretch its cash out until Halloween or so. But it will be unable to make payments on its debt after that. What should treasurers do or know?
MMFs and coming new rules
The comment period is over for suggestions to the latest proposals from users of money market funds. Nonetheless, the SEC is continuing to put up letters from commenters. They are still overwhelming against the proposals – mainly centering on the floating net asset value regime the SEC wants some of the MMF industry to adopt.
This in itself will cause disruptions to the market. One commenter, William Farrell, executive VP at M&T Bank writes:
“Briefly, M&T believes that: (i) requiring the creation of “retail” and “institutional” prime money market funds will place a significant burden on prime money market fund sponsors; (ii) requiring “institutional” prime money market funds to have a floating NAV will drive most users to Government money market funds or to other, less suitable products; and (iii) liquidity fees and redemption gates will create risk and uncertainty that will make retail and institutional prime money market funds undesirable to investors.”
But recent comments from Boston Fed President Eric Rosengren show how regulators will not be dissuaded by such arguments. Mr. Rosengren said SEC proposals will need to be enhanced.
“… I would stress that MMMF reform is overdue. However, it is important that the reforms actually reduce the financial stability issues that remain under the current structure. Promising a fixed NAV with no capital while taking credit risk is not sustainable — especially in potential future crises where the response of the public sector will be substantially limited, compared to 2008. MMMF runs should not be allowed to once again impede the flow of stable funding within our financial system.”
Therefore, he strongly support[s] requiring a floating NAV for all prime funds, both institutional and retail, which would treat these funds like other mutual funds. Investors who want a fixed NAV can keep their funds in government-only funds — and those should have the vast majority of their portfolios invested in cash and government securities.”
What will be the consequence of these rules? Some members of the NeuGroup universe suggest the new rules would be highly disruptive and then cause runs of other kinds. First there could be a massive shift to government MMFs, then a rush to commercial paper, creating a supply problem, and finally, as Mr. Farrell points out, a possible rush into even riskier assets.
In-house banks
IHBs have been a hot topic lately on the agendas of many a NeuGroup peer group. IT has written about IHBs plenty in the past but they continue to evolve and change with the (regulatory, global expansion) times. All of this of course is to make IHB structures ever more efficient and to help companies minimize transaction volumes and costs. Citi has been a big proponent of the “Next Generation” of IHBs and we’ll check in with them to see what’s new.
Also for consideration:
- Bank relationship management
- Paycards
- Working capital management trends