BBH Liquidity Management Guide
Brown Brothers Harriman published a new report as part of its "2016 Regulatory Field Guide," entitled "Liquidity Management: Get Fluid." Author Pranay Sammera writes, "Almost eight years after the Reserve Primary Fund infamously "broke the buck"; the dust is beginning to settle around a new institutional liquidity landscape. It is clear that this new landscape is significantly different than the one we have known and requires purposeful navigation. The effects of the rules enacted following the financial crisis are now taking shape. New US money market fund rules go live this autumn. Basel 3 is a reality and, after almost a decade, the Fed in the US has raised interest rates. The institutional liquidity management landscape is filled with an array of choices and access points. Cash professionals are re-emerging from a hiatus with new perspectives and tools -- in addition to their old scars -- to lead the way. Short-term investment products such as money market funds, repurchase agreements, and other traditional outlets for liquidity management have been scrutinized by regulators. In addition, product offerings are being re-examined by manufacturers for long-term strategic viability. Bank of America, for example, sold its money market fund business to BlackRock in November 2015. At banks, non-operating deposits have become anathema as they are subject to the most severe run-off assumption of 100% when calculating relevant leverage ratios. The upside in 2016 is that there is far more clarity for cash investors around the impact from changes, and paths through the new landscape are becoming clearer." The piece adds, "The prime institutional money fund space represents $875 billion of the $2.7 trillion money fund market in the US. Approximately 40 to 60% of prime institutional money fund assets are expected to move into other products this year. In preparation for the new US money fund regulation many fund manufacturers have segregated institutional investors from retail and in some cases, have morphed their prime funds into government funds, allowing them to retain a steady $1 per share net asset value (NAV). Institutional cash professionals opting to stick with government funds therefore face a trade-off: sacrifice yield, in exchange for the convenience, ease, and comfort of sticking with established models and practices based on the $1 constant NAV principle." Sammera concludes, "The post-crisis period has been a period of upheaval. As interest rates tick higher, there will be a greater opportunity cost inherent in idle, un-invested cash. In this new landscape, there is the opportunity for cash professionals to take a leadership role in defining the optimal model. As cash takes its rightful place among actively managed asset classes, the challenges are real but the reward and opportunities are great." In other news, Federated Investors CIO Debbie Cunningham released her latest "Month in Cash commentary, "Can't Blame the Fed This Time." She writes, "In December, the Federal Reserve took its customary two days to deliberate before releasing its decision to lift rates off near zero for the first time in seven years. But for the market, the verdict is still out. With the recent volatility, some are questioning if the hike was the correct move. We think it was and that the market turbulence has more to do with significant overseas economic issues and oil prices than a small, 25 basis-point increase in rates."
