In their latest Quarterly Corporate Cash Briefing webinar, principals from Treasury Strategies talked about trends in corporate cash and led a panel discussion on the ramifications of next Wednesday's meeting of the SEC Commissioners to address money fund reform. (See our "Crane Data News" from yesterday "SEC Posts Notice Confirming MMF Reform Vote on July 23; Market Share.") The 45-minute webinar featured commentary from Tony Carfang, partner, Treasury Strategies; Edmonia Lindsey, managing director, Treasury Strategies; Debbie Cunningham, chief investment officer, global money markets, Federated Investors; and Roger Merritt, managing director, Fitch Ratings.
On the SEC's meeting July 23rd to discuss money fund reform, Cunningham said the rumor mill has been churning with regard to what the SEC staff will recommend to the commissioners. "We've heard, from a rumor mill perspective with no confirmation, the staff recommendations are as follows: one, floating NAV plus gates and fees for institutional prime funds; two, gates and fees for retail prime funds; and three, the exemption of government money market funds away from these requirements, which will also be extended to municipal money funds."
However, added Cunningham, the commissioners themselves have expressed, very publicly in many instances, differing viewpoints on the most appropriate path forward. So it's hard to say what the outcome will be. "The meeting will be held, the discussions will take place, and we'll see if there's a vote. If there is a vote, we'll see what the outcome of that vote is."
There is also speculation that the U.S. Treasury is in conversations with the SEC about how to meet Commissioners Gallagher and Aguilar's concerns about the tax treatment of the daily transactions in and out of money funds, said Carfang. "That would then pave the way for them to vote in favor of the fluctuating NAV; otherwise they might not vote for it," he said.
The panelists also discussed the impact of other regulations, including Basel III. "The simple takeaway is, it means that banks are going to have to hold more capital and more liquidity, which in turn has knock-on effects for both corporate treasurers and money funds," said Merritt. "We're starting to see new capital instruments in the market that are specifically designed to be Basel III compliant." Added Cunningham, "One of the types of structures more recently that has evolved that addresses some of these concerns is what I'll call the partial non-call structure. That's a structure that has become quite popular."
On adjusting portfolios in a rising interest rate environment, Cunningham said, "We certainly don't want to take large bets in the context of that changing rate outlook. But I think modifications as we go into that time period -- which would include maybe shortening your duration a little bit, maybe taking on a little more in floating rate issuers that would be responsive to that rising rate environment -- might be more prudent in that rising rate environment."
Also, Carfang provided an update on corporate cash levels for Q1 2014. U.S. corporate cash was at $1.85 trillion as of March 31, a $90 billion drop, the largest quarter-over-quarter drop on record, he said. "We're not quite sure if this is the beginning of a reversal. We'll know more when we see next quarter's statistics," he said. However, he added, there's been a lot of activity this year in cross-border mergers, particularly where U.S. companies are moving their headquarters overseas. "Perhaps some of that activity is reflected in the drop in US cash." To that point, while corporate cash is decreasing in the U.S., it is rising in the U.K., the Eurozone, and Japan. Corporate cash levels increased slightly to 0.54 trillion GBP in the UK, rose to an all-time high of over 2 trillion euro in the Eurozone, and spiked to 243 trillion yen in Japan.
Federated's Cunningham also commented on a variety of subjects, including regulations, interest rates, and portfolio strategies in her quarterly Money Market Update, delivered Wednesday afternoon. She said Federated had no exposure to the Portuguese bank, Banco Espirito Santo, which missed a payment and roiled the markets earlier this month. "There was no exposure to that from a money market fund perspective, not from a Federated or [from an] industry standpoint. That issuer was nowhere close to being money market eligible. Its long-term rating, depending on whether you look at the bank or the bank holding co, was either 'B' or triple-C, which are obviously in junk land and is not something that would be eligible or would ever be considered in the context of a high quality money market fund." [Crane Data verified that no money market funds hold this name nor any Portugese-related debt.]
In other news, SEC Chair Mary Jo White released a statement on the fourth anniversary of the Dodd-Frank Act. "I expect the Commission will soon implement critical Dodd-Frank Act rules for credit ratings agencies and securitization, in addition to finalizing important new rules for money market funds," she wrote. Also, another comment letter from Arnold & Porter's David Freeman on behalf of Federated Investors was posted to the SEC's "Comments on Proposed Rule: Money Fund Reform" website. Watch for excerpts and coverage of this on Monday.
