NAVIGATING THE NEW TREASURY INVESTMENT ERA

SUMMARY

The solutions presented in this desk reference will help corporate treasury manage the new com­plexities brought about by Dodd-Frank, Basel III and MMF 2a-7 reform.

While bank deposits and Prime MMFs continue to be an integral part of corporate portfolios, regulations are forcing treasury practitioners to more actively manage those assets. Institutional 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 Institutional Prime MMF’s need to maintain their very viability, fund managers are extremely incentivized to stay above liquidity minimums where the possibility for fees and gates exist.

The nature of MMFs investing in high-quality short-term securities has resulted in nominal volatility as demonstrated by historical Market Net Asset Value MMF computations. However, even minute fluc­tuations can cause tax and financial reporting problems, which is why the IRS and Treasury’s proposed Simplified Tax Accounting rules for Variable NAV MMFs were so well received. This record-keeping relief eliminates the biggest MMF reform challenge as Institutional Prime MMF investors will not have to track individual purchase and redemption transactions.

The VNAV MMF settlement model is beginning to unfold with the majority of fund complexes leaning toward three intraday strikes at 9am, 12pm, and 3pm ET, enabling Prime MMF investors to receive settlement of cash throughout the day. Some fund companies are also adding an end-of-day strike at 5pm ET that would operate on a T+1 basis, which is useful for locking in the transaction and price to facilitate an early redemption settlement on the following day.

Integrated systems and automation become even more important with the complexities of intraday pricing and settlement. ICD worked with fund companies, transfer agents, clearing and custody banks, auditors, technology vendors and clients on streamlining VNAV MMF workflow to provide daily liquidity, seamless integration with treasury workstations and automated settlement solutions.

With Basel III penalizing banks for holding non-operational corporate deposits on their balance sheets and MMF Reform changing the supply and demand of various treasury investment alternatives, corporations are considering alternative investments. Ultimately, Bank Deposits, Institutional Prime MMFs and Government MMFs will still dominate corporate portfolios, with other investment alternatives getting increased attention.

Regardless of a corporation’s investment asset allocation, it is important to have a complete un­derstanding of portfolio counterparties and to regularly evaluate the relative financial strength of those counterparties. The most efficient method for regularly analyzing counterparty exposures is through leading indicator metrics like stock prices, capital adequacy ratios and CDS spreads. Practitioners should immediately engage in additional due diligence if a portfolio counterparty has:

  • insufficient capital adequacy,
  • stock prices falling more precipitously than peer companies, and/or
  • CDS prices widening at a much higher rate than peer companies.

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 analyze risk, liquidity and yield factors and construct their optimal portfolio. In most cases, those optimal portfolios will include Institutional Prime Money Market Funds.

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