Last week, Treasury Strategies hosted its latest "Quarterly Corporate Cash Briefing," which featured TS's Tony Carfang, Debbie Cunningham of Federated Investors, Greg Fayvilevich of Fitch Ratings, and Michelle Price of the Association of Corporate Treasurers. Carfang discussed "earnings credit rates," saying, "Those are the rates that bankers credit their corporate clients as an offset against service charges.... Earnings credit rates have increased at a very slow pace even at a time when market interest rates ... have of tripled.... As you can see the spreads [between ECRs and MMFs] have widened from 19 bps in January 2017 to 170 bps today. Prime money funds are [yielding] around 2%. So it's fascinating that corporate treasurers would keep cash in their banks at 59 bps [ECR average]."

He explains, "Probably it's the case that companies either have some inertia.... All of you corporate treasurers out there ... the loud and clear message is collectively you're sitting on a $1 trillion that is earning well below market rates. You may have maybe a lot of reasons for that. You may not have the technology to capture all of your balances every day and get them invested. You may not have visibility on all of your bank accounts. But these are all things that you really ought to be paying attention to particularly with the gap [in rates]."

On Brexit, Fayvilevich comments, "There is a question of delegation. It seems like delegating investment management to a non EU entity might work. Then in terms of the funds, [for] either European funds being sold into the U.K. or the other way around, my understanding so far [is] there are no limits announced [on] European funds being sold into the U.K.... There's certainly some reshuffling of domiciles and resources in the asset management industry [that could occur].... I think everybody is going to work with as much as they can to make sure that the disruptions of clients is going to be minimal. But I think it definitely is going to be a lot of work for us on the rating side, and for the asset managers setting up their funds. In a way similar to what we've seen with U.S. reform and in European money fund reform, there's a lot of work that happens in the background on a lot of resources devoted to these things."

Cunningham says, "We have, at least from our own shop's perspective, our dollar denominated products in the E.U. space domiciled in Ireland. We do not have euro-denominated. We did, those were all Irish, but we closed them once we get into the negative interest rate environment. So we're dodging that bullet from a regulatory perspective. But because they're domiciled in Ireland ... those ones really shouldn't be much of a problem. There's not much of a market for those funds in the UK already. Our sterling-denominated funds on the other hand, are very much U.K. or U.K.-centric, but they're also registered in the U.K. So I actually don't think it can pose too much of a problem no matter whether it's a hard Brexit or soft Brexit, one that allows for the rules to be harmonized, or segregated. I think at least for us, we're in a pretty good position with our products and our clients kind of aligning. [But] we're working very hard for it not to become problematic."

On European money market fund regulations, Price explains, "The European money market fund regulations come into play for new funds ... in the next week or two, but for already existing funds, not until the 21st of January 2019. We're really expecting to see implementation by corporates over how you treat reform this year. What we are expecting is GBP-denominated sterling funds will move to low volatility net asset value {LVNAV) funds, while we're hearing that euro-denominated funds will primarily move to VNAV funds. This difference is being caused by the negative interest rates in Europe where money market funds are denominated in euros. They may not be able to operate as LVNAV funds ... because the EU regulators are opposing the reverse distribution mechanism, which is basically the ability to cancel shares. As you know, euro-denominated money market funds are in negative yields at the moment."

Fayvilevich adds, "When money fund reform in the U.S. was occurring, it coincided with the Fed starting to really raise rates. I think that was helpful for reform, because government money funds here started picking up yield and I guess made for an easier transition for investors. It is curious that the same kind of convergence might happen in Europe as well with the euro funds, as the European Central Bank is starting to tighten and rates potentially will rise. I think the convergence won't happen quite as well in terms of rates being high enough for LVNAV funds right away.... We think the transitions are going to happen the fourth quarter. We know this one fund manager has publicly said that they're going to convert funds into LVNAVs at the end of November. So investors will be able to see how that's really working out.... Investors [should] take a look at their investment policies and see if they're able to invest in some of these products."

In related news, Strategic Treasurer's Craig Jeffery and Capital Advisors Group's Ben Campbell spoke recently on a webinar entitled, "Survey Results: Liquidity Risk" based on their "2018 Liquidity Risk Survey." The description tells us, "This survey results webinar will cover a wide range of topics and trends on liquidity risk mitigation practices. As one of our oldest running surveys, we are able to provide valuable year-over-year data that shows major and minor shifts in corporate risk mitigation strategies and predict future trends. Join us as we take a look at how macroeconomic changes and new regulations continue to impact all treasury professionals as they approach business decisions."

Campell comments, "We are into year two of adjusting to money market reform [following] a tremendous asset shift out of the commercial paper markets and into the Treasury market. This [has] generally made the commercial paper markets a bit cheaper relative to Treasuries and relative to some of the other positions. It has also forced a number of treasurers into switching from Prime MMFs with floating NAVs into their Treasury/Government counterparts that have a fixed NAV. That has widened ... commercial paper ... spreads."

He continues, "The advent of liquidity coverage ratios, part of the Dodd-Frank regulation implemented several years ago, ... generally made deposits more expensive ... for the banking community. So we had anticipated when these were put in place that there would be a general spread widening as we went through time between the other alternatives of commercial paper and the bank products.... Given this general environment ... if you are earning 50 bps or lower in a deposit product or even if you are in a treasury MMF that is earning in the 160 to 180 part of the curve, what happened with this significant opportunity caused by not doing something a little more active."

The webinar explains, "The largest number of respondents (30%) have added asset classes. They were expanding the number of securities and types of security classes that they could go into.... It is sort of interesting for me to note that expanding asset classes was the largest factor of movement in regards to modifications in the investment policy. The other smaller numbers ... range from lowering their minimum credit rating requirement (9%)."

Campbell adds, "The next part we are going to take a look at are the actual short-term investment practices aside from just what modifications were made on the policy side.... If you go back and remember the significant widening of spreads between bank products ... you would expect that people would start to pursue individual securities on the front end of the curve. That is exactly what we are capturing here ... a decrease in the use of bank deposits.... I think this is the first decrease of bank deposits that we have seen since we started the survey. The other increases that we have seen are related to the individual purchases and the individual securities."

(See also, Capital Advisors Group's recent paper, "Counterparty Risk Management for Corporate Treasury Functions," which says, "One of the great lessons we learned from the financial crisis a decade ago was that the financial world we lived in was not as safe as we thought. This statement remains true today, despite recent industry and regulatory efforts aimed at bolstering the strength of the financial system…. In conversations with corporate cash investors, we found an increased awareness of counterparty risk management.")

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