FIS, formerly SunGard, published "FIS Corporate Cash Investment Report 2016: A New Era For Corporate Cash Investment?" The study's introduction says, "Now in its sixth year, FIS' Corporate Cash Investment Report provides an in-depth exploration of corporate attitudes to cash investment, investment policies and transaction execution in an environment of market volatility and regulatory change. With six years of data, this report is unique in presenting both the findings from the 2016 survey, and an analysis of ongoing trends. The year 2016 marks a "watershed" year for many corporate treasurers with surplus cash to invest with a convergence of issues that individually have a considerable impact on investment, which are exacerbated when taken together." (See our Sept. 21 News, "FIS (formerly SunGard) Portal Conducts 2016 Cash Investment Survey.)
FIS writes, "Regulations such as Basel III are impacting on their banks' willingness and ability to accept short-term deposits, regulatory change in the US is having a significant impact on the prime money market fund (MMF) landscape, while the low -- and in Europe, negative -- interest rate environment is also impacting on investment strategy. This year, the study involved a representative sample of 81 corporations globally across a wide range of industries. Fifty-one percent of respondents were located in North America, with a further 38 percent in Europe."
Among the report's "Key Findings," it states, "Corporate cash balances continue to rise in 2016, a consistent trend since 2012, although the rate of growth has slowed this year.... 2016 marks a major change in cash investment challenges: 60 percent noted that the low or negative interest rate environment was their number one concern. This contrasts with visibility, regulatory, asset availability and trapped cash that have variously topped treasurers' list of investment challenges over the previous five years."
FIS explains, "Deposits remain the investment instrument of choice for corporate treasurers: 82 percent of participants noted that they used deposits, investing an average of 48 percent of cash. Limit headroom with authorized dealing banks is the first priority when depositing cash; however, yield is more important to treasurers than whether a bank is a relationship bank, which would appear to contrast with many banks' and treasurers' emphasis on "share of wallet". Sixty-eight percent of treasurers currently transact deposits by telephone, but the value of independent dealing portals to seek competitive quotes and integrate transactions into the treasury management system (TMS) is becoming more compelling with a combination of reduced availability of short-term (i.e. less than 30 day) deposits, newly emerging deposit products and a focus on generating a positive yield."
The comment on the "new liquidity fund environment," "Prime fund reform in the US that took effect in October 2016 is already impacting on corporate investment decisions. Thirty-nine percent indicated that variable net asset value (VNAV) is a disincentive; in addition, 34 percent were concerned that the ability to withdraw cash from prime MMFs could be suspended in certain situations. Consequently, 65 percent of treasurers involved in this study expected to reduce their holdings, more than half materially, a prediction that has been validated by the flow out of prime funds into other instruments, such as government funds, during the three months leading up to the October deadline."
The study continues, "2016 has witnessed two important developments in the execution of MMFs. First, the proportion of companies using telephone dealing has fallen, from 38 percent in 2014 and 2015 to 23 percent in 2016. Second, the use of independent portals exceeded proprietary, single-provider portals for the first time in 2015, and the gap has widened further in 2016. Thirty-seven percent now use independent portals compared with 23 percent using proprietary portals."
The key findings add, "Awareness of regulatory change and in particular, the impact on corporate investment strategy, appears to be low. Deposits and constant net asset value (NAV) MMFs continue to be the instruments in which treasurers (76 percent and 51 percent respectively) anticipate investing a large proportion of their cash, despite the potential hurdles."
FIS details its findings, telling us, "Deposits remain the investment instrument of choice for corporate treasurers: 82 percent of participants noted that they used deposits, investing an average of 48 percent of cash. Sixty-five percent use money market funds, mostly constant NAV, but this will necessarily change now that new regulations have taken effect in the US. For example, we have already seen a considerable outflow from prime funds to government funds, although it is not yet clear whether this will reflect a permanent shift. Furthermore, treasurers need to be prepared for changes to deposits and European MMFs, as discussed further below. Other high quality, short-term instruments such as certificates of deposit (used by 32 percent of respondents), commercial paper and short-dated fixed-rate bonds (24 percent each) have emerged more strongly, a trend we expect to continue, although availability remains a challenge."
They discuss "A new era for MMFs," saying, "Money market funds have become a popular investment choice for corporate treasurers, originally in the US, then and more recently, a number of other countries globally. In particular, treasurers recognize the liquidity and security benefits of MMFs, with same-day access to cash and inherent diversification of high quality assets. Since the global financial crisis, there has been greater regulatory scrutiny of MMFs, and a variety of changes have already been implemented. This year 2016 marks the next, and arguably the most significant step in the tightening of MMF regulations. In the new US Securities and Exchange Commission (SEC) reforms took effect on October 14, 2016."
The survey results continue, "Prime funds must now publish the NAV based on the current value of the assets they hold, rather than maintaining a constant value of $1 a share. As a result, the fund's price will fluctuate in line with market conditions, which has accounting and valuation implications. Thirty-nine percent of respondents noted that the floating NAV is a disincentive to investing in these funds. In addition, MMF boards have new tools, such as the ability to impose liquidity fees and redemption gates, to prevent or limit runs. Since the new rules came in, if liquid assets (i.e. assets that can be liquidated within one week) fall below 30 percent, the fund may impose a fee of up to 2 percent on redemptions. If liquid assets fall below 10 percent, a fee of 1 percent must be imposed. In addition, the fund can also suspend redemptions for up to 10 days if the 30 percent threshold is breached. This has led to concerns amongst many investors -- 34 percent of respondents in this study -- that the ability to withdraw cash from prime MMFs could be suspended. Twenty-eight percent also noted concerns about liquidity, some of which are related to the new regulations."
Furthermore, FIS explains, "These changes have already resulted in an exodus of more than $1 trillion from prime money market funds between January and mid-October 2016, much of which has flowed into government MMFs which are not subject to the same rules. These in turn have increased their assets from $1 trillion to $2.1 trillion over the same period. As figure 8 shows, around a third (35 percent) of treasurers that invest in US funds expect their investment strategy to remain unchanged, but 65 percent expect to reduce their holdings, more than half of whom expect this to decline materially."
They add, "The extent to which this will happen in practice remains unclear, however. In reality, there are few instruments that offer the security, liquidity and diversification that liquidity funds offer. Furthermore, although security and liquidity are the most important investment criteria for corporations, yield could be a more powerful incentive in the future. More than a third (38 percent) of participating treasurers for whom this issue was relevant indicated that they would be prepared to consider investing in variable NAV funds if the yield grew by 21 basis points or more, which is feasible given the potential for an increase in the USD base rate, although for a third, the uplift in yield would need to be more than 50 basis points. Consequently, we may see more corporate treasurers maintaining their current MMF investment strategy than anticipated, and others returning to these funds in the future."
Finally, FIS writes, "As this study outlines, treasurers in all regions need to consider the impact of Basel III on their investment strategy, and whether prime funds still meet their investment criteria.... Other short-term investment instruments such as commercial paper, certificates of deposits and short-term fixed rate bonds will continue to be an important element of many companies' investment strategy, as well as government debt, but there is also potential for the increase in investment in emerging types of fund such as bond funds, particularly for core and strategic cash. The next year will be a significant one as regulatory change takes effect, and the geopolitical and market environments continue to evolve. Inevitably, these will impact on corporate cash investment strategy, and the wider business strategy of which this is a part."
