UBS Global Liquidity Management writes in a recent "Liquidity Perspectives" a brief entitled, "Investment policy guidelines: Time for a review?" They say that the "New environment may require a refresh," explaining, "It has been an interesting year for cash management. Sweeping regulatory changes and uncertainty around the future direction of interest rates in the US are creating a challenging environment for corporate treasurers in managing liquidity." We discuss this white paper below, and we also review some recent news in the municipal money market sector.

UBS tells us, "The combination of market and regulatory factors is forcing many treasurers to look at their investment policy guidelines in ways they haven't done in years. Multinational corporations are especially under pressure. Not only do they have to adapt to the way banks are valuing deposits and address new considerations around money market funds, they also may need to reevaluate their investment policies and how they can be adjusted when traditional methods of capital preservation may not be effective."

They write about, "The importance of cash segmentation," stating, "Many investment policy statements provide detailed guidelines on how to invest cash, but they rarely address specific cash buckets. The one-size-fits-all approach may have worked in a world when interest rates were at historically normal levels; the line between operating and non-operating deposits was blurred; and there was limited distinction between stable and variable net asset value (NAV) short-duration products. However, today's challenges may call for a more customized approach. A clear delineation of cash may be critically important to achieving desired outcomes while also adapting investment policies to the new world."

The paper says, "Consider broadening the universe of investable securities," and tells investors, "Having a single set of guidelines for all types of cash may limit treasurers' ability to tap into the broader set of investment vehicles that have become more prominent in response to the new environment. A one-size-fits-all approach may be limiting because the universe of allowable investments is capped to the safest option. This creates an opportunity cost, because all cash is subject to guidelines applicable to working capital."

UBS states, "However, banking and money fund reforms are ushering in alternative solutions, such as separately managed accounts and short-duration bond funds. Despite the diversification benefits and potential yield enhancements these solutions could offer, most policies do not account for them. By segmenting cash and assigning distinct guidelines for each bucket, treasurers can have access to additional cash-management tools.... A broader set of investable options including separate accounts and private placement funds could also mitigate the effects of regulatory changes affecting money funds."

A section entitled, "Adjusting investment policy to floating NAV," explains, "Upcoming money fund reforms will impose the potential for gates and fees on all prime and municipal money market funds, and floating NAV on institutional prime and institutional municipal money market funds. As a result, treasurers have important decisions to make when adjusting their investment policies. The magnitude of the changes and the process involved in getting these changes approved may largely depend on the following two variables: Capital preservation: Is it strictly or loosely defined? Strictly means zero tolerance for gains and losses. Cash segmentation: Is the policy cash-bucket specific or not? Treasurers should also give careful consideration to the gates and fees that may be imposed on prime and municipal funds."

Finally, the piece adds, "Investment policies with separate guidelines for each cash bucket can provide more flexibility in dealing with gates and fees. For example, liquidity requirements on reserve cash are not as stringent as they are on operating cash, so with minimal changes to the policy, prime fund investments could simply be shifted from the operating cash bucket to the reserve cash bucket and still stay compliant with a given corporation's guidelines."

In other news, an article in The Bond Buyer entitled, "Clarity's Vision Realized as Ohio Bond Lands on Its Platform," tells us, "Clarity Bidrate Alternative Trading System, a division of Arbor Research & Trading LLC that aims to rejuvenate the variable rate municipal market, has won its first new bond issue."

It explains, "The deal came to market on Oct. 25, when the State of Ohio sold $32.3 million of variable rate bonds, series 2016C. After the initial underwriting by Key Bank, the bonds will go up on Clarity after the reset on Nov. 1. Clarity's goals include expanding and centralizing the market, bringing more transparency, and use competitive pricing to rejuvenate the variable rate municipal issues, though there will be other structures available on the system. The variable rate market collapsed in 2008, as the fall of Lehman Brothers triggered a run on the securities."

Bond Buyer comments, "Clarity's chief executive officer and president, Robert Novembre, said that orders for the Ohio bond ranged from the whole deal to as small as the minimum denomination of $100,000.... Novembre said the deal did better than anticipated and Clarity will be adding more investor clients in coming weeks."

The piece quotes Novembre, "The State of Ohio was the catalyst to spark the modernization of the marketplace, which is long overdue.... Now that we have the first one done, we want to get the ball rolling more aggressively. We are confident in growth of the pipeline, stronger odds of getting deals, and we are not just reliant on new money issues either."

Finally, Bond Buyer adds, "Clarity is in the document phase with a second issuer, with the hope that the transactions will go through by the year end. While the total amount of the deal may not on the larger side, the importance of the deal far surpasses the amount. "This was a historic moment for us and for the market," he said. "It's something new and is designed to help all parties."

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