With the end of the year coming up, treasurers contemplate coming rules and their impact.
As treasurers begin to fully grasp the impacts of recent regulations, it is clear that Basel III and Dodd-Frank will have significant impacts on how they operate their day-to-day treasury activity. Follows are a few rules and their impacts that members of The NeuGroup’s Treasurers’ Group of Thirty (T30), which met in early October, are thinking about.
With the potential expiration of the FDIC’s unlimited insurance — the Transaction Account Guarantee program — on December 31, 2012, most treasurers indicated they would take money from banks and move it to other investment alternatives including corporate obligations. The lack of FDIC insurance would most likely impact their decision to keep funds of any significant size on deposit with banks.
Similarly, at the recent Association for Financial Professionals 2012 Annual Conference, nearly half of respondents to a poll said the percentage of corporate balances held in bank accounts would be lower 6 months from the time of the conference.
It should be noted that almost as many respondents felt the balances wouldn’t change significantly, which may indicate that many feel confident the FDIC will extend the program. According AFP data, most corporates would not change investment behavior if TAG expires; however, some may diversify into funds and direct securities.
On the other hand, changes to money market fund rules could have dramatic effect. The proposed MMF reforms – including a floating net asset value, holdbacks and capital buffers, would change the way treasurers use money market funds as a part of their short term investment toolbox. T30 members are monitoring these developments closely as the final regulation decisions are made by the SEC and others.
Currently regulators are grouping after having met with failure in their last go-round to tighten controls of MMFs. On October 18, the Financial Stability Oversight Board (FSOC), which has been under pressure from all sides, held a closed-door meeting that was likely convened to discuss the next steps in its mission to restructure MMFs. That meeting came on the heels of several weeks of statements from the US Treasury, Federal Reserve Governor Daniel Tarullo and the International Organization of Securities Commissions (IOSCO), all calling for a continued effort to regulate MMFs.
Dodd Frank and the process of obtaining end-user exemption status will be front and center for treasury groups over the next several months as the regulations finally take shape, allowing treasurers to prepare the necessary language for board approval to operate in this new, elevated regulation world.
Although the high-level regulations are clear many are not. As one member astutely put it, “the devil is in the details” as it relates to structures like in-house banks and other types of consolidated trading entities and their pursuit for end-user exemption. There was much discussion about the type of entity corporates would use to execute foreign exchange trades going forward and if each entity needed to seek its own end-user exemption status. These types of details are being discussed now ahead of the upcoming due date for exemption status.
But perhaps what many might be starting to think is that despite any exemptions, there’s no hiding, or exemption, from new market norms. That is, an exemption from clearing and even margining will not exempt corporates from the economics of the new market conditions for derivatives confronting all other non-exempt counterparties (see related story here). Rules covering banks and broker-dealers will incent clearing and posting margin for derivatives transactions with added costs for those that are not. These will eventually get passed on in some way. Corporates surely cannot expect to win an exception to every element of OTC derivatives reform.