Online money market trading portal and financial software company Sungard released its 5th annual "Corporate Cash Investment Report," which "reveals significant challenges for treasurers due to regulatory report reforms" and which indicates that the majority of corporate investors will stick with Prime money market funds after reforms and keep investment levels similar." A press release says, "The study examines treasurers' changing attitudes toward cash investment over the last 12 months -- including strategic cash holdings, asset allocation, investment policies and transaction execution -- as well as identifying trends and developments over the last five years. Survey participants represented a cross-section of geographic regions and industries, with 46 percent located in North America and 37 percent in Europe."
The report's "key findings" include: "Corporate cash balances continue to rise strongly in 2015, observed by 45 percent of respondents. Twenty-six percent of those that reported an increase in cash balances noted that these had increased by more than a third.... Investment challenges have evolved significantly over the past 12 months. Finding suitable repositories for corporate cash remains the top priority at 46 percent, but while Basel III barely registered a year ago, it is now a key priority for 43 percent of respondents. Money market fund (MMF) reform and the problem of 'trapped' cash are also key issues facing many treasurers."
The survey also found that: "Treasurers have become more confident in segmenting their cash into short-term, core and strategic cash, providing more choice of investment instruments with the potential to generate higher returns. Sixty percent of treasurers in the U.S. 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."
SunGard's findings also include: "Treasurers expect to use term deposits (19 percent), commercial paper (15 percent) certificates of deposit (13 percent) and government debt (13 percent) either in addition to, or as a replacement for prime MMFs, although they anticipate using a wide range of instruments. Direct investment has resourcing and risk implications, however, which treasurers will need to address before expanding their investment portfolios. For the first time since we launched the study in 2011, use of independent portals has overtaken other dealing methods for short-term cash instruments, including telephone (38 percent) and proprietary portals (21 percent)."
On money market funds, it says, "As this study has demonstrated over the past five years, bank deposits and MMFs are treasurers' most popular choices for investing surplus cash. MMFs remain more common in the U.S. and Europe than in other regions, but the use of MMFs in Asia is also growing.... However, the next 12 months will bring major changes to both deposits and MMFs, compelling treasurers to review their investment policies and processes, and in some cases change the way they invest surplus cash ."
SunGard's survey explains, "By August 2016, new SEC reforms will take effect, which require a floating net asset value (NAV) for institutional prime money market funds in the U.S., so daily share prices of these funds will fluctuate, as will the market-based value of fund assets. In addition, MMF boards will have new tools, such as the ability to impose liquidity fees and redemption gates to prevent or limit runs.... These changes, particularly the need to maintain a floating NAV, have valuation, accounting, and operational implications for fund managers, and will therefore have a profound impact on the MMF industry.... Given that there are less than 12 months until the implementation deadline for these reforms, treasurers will need to act now to ensure that their investment policies, accounting methodologies and systems are ready to adapt."
It continues, "Among those that currently invest in prime MMFs in the U.S., the majority (60 percent) anticipate that they will continue to invest in these funds at a similar level to today, although 37 percent anticipate decreasing the level of investment. Accounting considerations (43 percent), intraday limit concerns (30 percent) and the need to revise investment policies (26 percent) were cited as the most important reasons for this. However, as treasurers become more familiar with new instruments and make the necessary revisions to their policies and processes, treasurers' anticipated reduction in their use of MMFs may not materialize in practice."
The Corporate Cash Investment Report continues, "Government funds are excluded from the requirement to have a floating NAV and given low yields generally, we may see a shift towards these funds, at least in the short term . This appears to be the expectation of many respondents to this study, but the potential to generate additional yield on prime MMFs compared with government funds as interest rates rise in the future may be an incentive to address some of the internal issues and return to prime MMFs. Forty-two percent of respondents indicated that the uplift in rates would need to be only 21-34 bps to justify returning to prime MMFs, although the remaining 58 percent would be looking for an additional yield delta of above 35 bps. In addition, many respondents anticipate diversifying their cash investment portfolio across a wider range of instruments. Treasurers are currently most attracted to term deposits (19 percent), commercial paper (CP, 15 percent) certificates of deposit (CD, 13 percent) and government debt (13 percent)."
Further, it says, "However, the future interest rate environment, availability of assets and treasurers' ability to segment cash will have an impact on these plans. Furthermore, treasurers will need to consider the resource implications of managing their cash assets directly, such as when investing in CP, CDs and repos, as opposed to outsourcing this to a fund manager. Treasurers choosing some of these direct investments will also lose the inherent diversification associated with the use of funds, whether MMFs, bond funds or separately managed accounts."
SunGard concludes, "As our survey results illustrate, regulatory change, both MMF reforms and the wider implications of Basel III, marks the most important change we have seen in the cash investment space since the global financial crisis. With an unprecedented period of low interest rates, which are now in negative territory in Europe, the value of surplus cash has been negligible over recent years. Even though it seems likely that the Fed will increase USD rates, interest rates across major currencies are likely to remain at very low levels for the foreseeable future."
They explain, "Added to this, with the most common investment choices, namely bank deposits and MMFs under threat, treasurers are now being forced to question why they are holding such large, growing cash balances.... Basel III will limit banks' appetite for some types of deposits, which will necessarily prompt treasurers to seek alternatives. Many treasurers are also concerned about the shift from constant NAV to variable NAV MMFs, and in some cases, their existing policies and systems do not accommodate these funds. However, this is likely to be a short-term issue rather than prompt a long-term change of corporate behavior. Treasurers value the inherent diversification, credit quality, rigorous criteria and same-day access to liquidity that MMFs offer, and they will continue to offer these benefits post-reform.... Even so, the combination of Basel III and MMF reform are likely to prove a catalyst for treasurers to review their cash investment policy."
Vince Tolve, executive vice president, SunGard's global trading business, comments, "Cash investment challenges have evolved significantly over the past five years, with a shift from operational to more strategic concerns as interest rates remain low and regulatory reform takes center stage. As banks encourage investors to move depositors off their balance sheets as a result of Basel III, turning to an alternative bank is becoming increasingly difficult as credit rating downgrades have reduced their choices of counterparty banks. In addition, MMF reform in the U.S. means that investors will need to consider the impact of constant NAV instruments on their investment policy, reporting and accounting processes. Going forward, treasurers should take three key steps: (1) understand the implications of regulatory change on their business, (2) review their policies and processes for consistency with regulations and consider revising them to permit investment in a wider range of instruments, and (3) make sure their systems and processes support the full range of instruments permitted within their policy."
