October 14, 2016

DAY OF RECKONING
Money fund reform is here. Are your portal and TMS up to the task?
by Thomas C. Knight, CCM

October 14, 2016 was “E-Day” for U.S. corporate treasurers, as it was the effective date for Rule SEC 2a-7. After several years of industry deliberation, additional money market fund reform was finally proposed and adopted in July 2014, and like the lava flowing down the side of a mountainous volcano, the new rules have finally arrived to transform the trading and risk management landscape for treasury practitioners and cash managers in both profound and practical ways.

In fact, reform enactment had already been in motion for months on the fund side. On April 14, 2016 new compliance rules became effective for fund companies, including new diversification and stress-testing requirements, new website information reporting and new disclosures on registration and advertisements. Policies and procedures have changed as well.

That October 14 effective date meant MMF reform operational changes for corporate treasury departments. Yet, the immediate consequences will vary greatly depending on your department’s level of preparedness. Those treasury functions that have taken a more disciplined approach may have already taken on new liquidity portfolio diversification and optimization strategies, updated compliance guidelines, revised redemption scheduling to better synchronize with new intraday strike times, adopted new simplified tax accounting methodologies and deployed deeper exposure analytics for managing broader counterparty risks.

VNAV implementations

At the center of reform are prime institutional MMF VNAV implementations that have fundamentally changed many portal operations—essentially converting from a money-based system to a shares-based system—displaying current shares and current share prices throughout the portal to determine current balances.

Institutional prime MMFs are now required to maintain a variable (a.k.a. floating) net asset value (VNAV) for sales and redemptions based on the current market value of the securities in their portfolios rounded to the fourth decimal place (e.g., $1.0000), where they previously rounded to the second decimal place (e.g., $1.00).

Prime MMF investors should maintain diversified portfolios and use compliance, reporting and monitoring tools to avoid VNAV MMFs that tread too closely to liquidity minimums. Given this heightened liquidity scrutiny, and prime MMFs’ need to maintain their strategic (and yield) value for treasury practitioners, fund managers are extremely incentivized to stay above liquidity minimums where the possibility for fees and gates exist.

The importance of connectivity

Another vitally important requirement for optimal workflow is portal connectivity to other treasury functions. Institutional trading and investment risk management portals must be deeply integrated and automated with treasury management systems, banking, and corporate ERP. Understanding how to organize, display and integrate data across multiple treasury management systems and applications is critical to having successful efficient processes.

Tanya Strawn, senior manager, treasury, for Starbucks, sees her trading portal as an invaluable tool, due to its ability to create thorough, timely analysis. “It’s very helpful to be able to compare funds by category, asset size, yield, asset flows and liquidity, in addition to visibility to aggregated exposures for current and potential portfolios,” she said.

 “VNAV tax and financial reporting was my biggest MMF reform issue,” she said. “The simplified tax accounting rules and gain/loss report alleviated that concern.”  

The following checklist will help you gauge whether you need to update your treasury portal now that MMF reform is here. Your portal should:

  • Display VNAV share and EOD pricing.
  • Show visibility to settlement strike times.
  • Track the last known public price (including intraday), and show up-to-date cash positions based on that pricing.
  • Compare VNAV MMF outflows and weekly and daily liquidity.
  • Compare historical VNAV MMF outflows and weekly and daily liquidity in reports.
  • Have compliance features that alert and/or block you from investing in VNAV MMFs with weekly liquidity below your established guideline.
  • Have compliance features that alert you if a VNAV MMF in your portfolio has weekly liquidity below your established guideline.
  • Generate gain/loss reports to streamline the simplified tax accounting method for VNAV MMF reporting.
  • Enable you to generate what-if scenarios that show performance and exposure analytics to help generate optimal portfolios.

Laurie DeGraaf, CTP, senior manager, treasury technology for Western Union, welcomes the reform tax accounting enhancements of her trading portal. “VNAV tax and financial reporting was my biggest MMF reform issue,” she said. “The simplified tax accounting rules and gain/loss report alleviated that concern.”

Additionally, your treasury management system should be assessed now that MMF reform has arrived.

  • Treasury management systems should report institutional prime MMFs in a shares-based model, as opposed to a money-based one, to accurately calculate accruals and EOD positions.
  • Wire payment processes to settle transactions may be required prior to the receipt of pricing from the fund.
  • For those using integration files to initiate payments through a workstation, receipt of both will be required to avoid settlement delays on VNAV fund investments and properly track account positions.
  • TMS should ingest institutional prime MMF (VNAV) ticket approved and/or order verified files for timely capture of transaction data.
  • TMS should also ingest prime MMF (VNAV) transaction priced files either as an intraday confirmation per transaction or EOD transaction pricing summary.
  • TMS must ingest institutional prime MMF transactions correctly to properly calculate accruals.
  • TMS should ingest institutional prime MMF (VNAV) EOD position files with EOD shares and EOD price for accurate balance and accrual reporting.
  • As an alternative to the EOD position files, TMS can ingest institutional prime MMF (VNAV) daily rates files with EOD price for accurate balance and accrual reporting.
  • TMS should ingest VNAV-enhanced versions of existing integration files.
  • TMS should update ingest processing to accommodate VNAV transaction workflow and share calculations, EOD price updates and balance calculations.

By performing some basic analyses made easier by technological advances, there are opportunities to increase yield while maintaining, and in some cases, decreasing risk. Guided with a clear understanding of a company’s investment objectives and risk tolerance, treasury practitioners can leverage technology to help analyze risk, liquidity and yield factors and construct optimal portfolios. In most cases, those optimal portfolios will include institutional prime money market funds.

Thomas C. Knight, CCM, is executive vice president and treasurer for ICD.

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