Most companies will stick with prime money market funds after Securities and Exchange Commission rules kick in in late 2016, according to a new survey. This could allay concerns many have that once the new rules are implemented – where prime funds move to a floating net asset value while government funds will retain a fixed rate – companies and their cash would make a dash to governments.
Companies would move their cash for at least a couple of reasons. One is simply that everyone else might do it, and two, companies would want to avoid the potential accounting issues that come with assets that could rise or fall in value.
The survey, from SunGard, revealed that 60 percent of US treasurers “anticipate that they will continue to invest in prime MMFs at a similar level once SEC reforms are implemented in 2016. Thirty-seven percent expect to decrease their holdings, identifying accounting, intraday liquidity and investment policy constraints as the biggest obstacles.”
Many market observers and participants have been concerned that a rush from prime to government funds would exacerbate the shortage of investments choices. But with companies staying put – they’re also planning on sticking with bank accounts (if they can) – there may not be such a shock to the system. Still, 37 of respondents plan on reducing their prime MMF holdings, pointing out the accounting, intraday liquidity and investment policy constraints as the biggest obstacles.
The SunGard survey also found that the challenges of investing surplus cash have changed over the past several years. Since SunGard began the survey in 2011 treasurers have moved from “operational to more strategic concerns.” For instance, in 2011 results of the survey showed that cash flow forecasting was corporate treasurers’ “greatest investment challenge.” But over the years, these challenges evolved from “market and regulatory issues.”
With these issues now behind them, “treasurers were most concerned about finding suitable instruments in which to invest … and unlocking trapped cash held in regulated markets such as China.” However, regulatory issues have come back strong as a big challenge, according to the survey, with “Basel III and its impact on corporates’ cash investment strategy is now a priority, emphasized by 43 percent of respondents, up from barely 20 percent in 2014 when almost none of the survey participants noted that this was their top issue.”
Another issue and one seen in recent NeuGroup benchmarking was the issue of deposits with banks. As one example of the regulatory impact treasurers face, many members of The New Group’s Assistant Treasurers’ Group of Thirty report having been asked to take their deposits elsewhere, particularly on the last day of a quarter when banks need to report certain capital and liquidity ratio levels. Some members have also been informed by their banks that certain types of services—including banking-center deposits and vault services—are being eliminated, greatly reduced or re-priced with enormous increases.
The SunGard survey also found this to be true.
“Increasingly, banks are encouraging investors to move deposits off their balance sheets as a result of Basel III, and with many international banks in the US and Europe now close to completing their Basel III implementation, this will continue over the year ahead,” SunGard said. “Furthermore, while regulators in other regions such as Asia have adopted different interpretations and timelines for Basel III adoption, ultimately all banks will need to comply with these regulations. In the past, if a bank has discouraged an investor from depositing cash, treasurers have typically turned to an alternative bank: however, this is clearly becoming increasingly difficult. The problem has been compounded by credit rating downgrades, so many treasurers now have a smaller panel of approved counterparty banks in which to invest.”
Combined with the new MMF rules, treasurers are challenged indeed.