Treasury Today Country Profiles in association with Citi

Risk and low yield top treasurers’ investment concerns

Question mark in a foggy window

Money market reform comes into effect in the US later this year, and Europe may not be too far behind. But a new survey reveals that it is no longer the changing regulatory environment that most worries the corporate cash investor.

Forget about floating NAV or liquidity fees and gates, it is low yields and counterparty risk that treasurers are now most anxious about when it comes to investing surplus cash.

So say the findings of recent research conducted by Fitch Ratings. Of the corporate treasurers surveyed by the ratings agency, 78% said their top cash investment challenge is the low yield environment, while a further 55% cited counterparty risk as the biggest issue. Regulation, meanwhile, appears to be less of a worry now, with roughly 55% saying that their allocations in institutional prime money market funds (MMFs) would stay the same or increase once these funds switch to floating NAV.

“Counterparty risk may be an even more daunting challenge today since Fitch’s survey was taken before the recent market sell off,” Alastair Sewell, Senior Director Fitch Ratings and Charlotte Quiniou, Director Fitch Ratings wrote in an article published on The Why Forum earlier this week. “Since then, we have witnessed a slowing, increasingly volatile China and the downdraft in energy prices.”

Perhaps the challenges posed by low yields and counterparty risk will push more treasurers to explore alternative investment options, like for instance, collateralised products. Tri-party repos are said to offer security to treasurers with concerns around risk, and for those worried about low yield, these products are also said to often offer a higher interest rate than a corresponding deposit.

However, as Treasury Today reported in September 2015, not every treasurer is convinced that tri-party repos are the answer to the yield problem. “I have looked at repos but I have decided at the moment the time and cost in setting up a repo is quite significant,” Asim Iqbal, Head of Treasury at British motoring association, the AA, said at the ACT Annual Conference 2015. “And from conversations I’ve had with other treasurers, I understand that the returns being offered by a repo might not be any more than that of a MMF deposit. So the question of tri-party repos is still out there for me.”

One thing is for certain, whether treasurers experiment with new products like the tri-party repo or stick with a more traditional mix of bank deposits and MMFs, today’s regulatory and market environment means a new approach to short-term investment will be needed at some companies. While cash levels are growing on the balance sheets of many organisations, cash segmentation is still not practiced universally in the corporate world. “Why is this?” ask Sewell and Quiniou. “Until now, money funds have been the ideal vehicle to meet liquidity needs, providing cash managers with a “free lunch” of yield, liquidity and preservation of capital. However, looming market changes means the free lunch is over and the cost of same-day liquidity will go up. It will be instructive over time as corporate treasurers come to terms with the new, more challenging cash management paradigm.”