Money market funds
Another area which is undergoing a considerable shift is that of money market funds (MMFs). Historically, most funds have run on a constant net asset value (CNAV) basis, whereby the price of a share is $1 (or £1/€1). Following the collapse of the Reserve Primary Fund in 2008, however, regulators have focused on bolstering the way in which money market funds operate.
In the US, new rules came into effect on 14th October which require prime funds and tax-exempt funds to operate on a variable NAV (VNAV) basis. The new rules also stipulate that funds can charge a 2% redemption fee or prevent redemptions altogether if liquid assets fall between a certain threshold. Over $1trn has already left the relevant funds since the beginning of the year in light of these changes.
“Most clients are just flipping from prime funds into treasury funds and waiting to see what happens,” says Mark Smith, Head of Global Liquidity, Global Transaction Services at Bank of America Merrill Lynch. “But those treasurers are flipping into an asset that is lower yielding, so the yield enhancement that treasurers can get from a money market fund versus a deposit is probably at a historic low.”
It’s not all bad news, however. Smith notes that the decline in prime fund investments has meant that prime funds are buying less of assets such as commercial paper, variable deposit notes and certificates of deposit (CDs). As a result, these assets are currently yielding at higher levels – presenting some interesting opportunities for treasurers.
Smith notes, “If you are a treasurer with a flexible, sophisticated investment policy, and if you have got the systems and the team needed to take advantage of this, there are some really good short-term opportunities.” As a result, he says that some companies are re-examining their investment policies to see whether it makes sense to review their policies in order to take advantage of the situation.
The situation is somewhat different in Europe, where negative interest rates mean that companies using prime funds are currently paying the funds to hold their money. Meanwhile, Europe’s money market funds are also tabled for regulatory change, although the money market fund regulation (MMFR) proposed by the European Commission in 2013 has yet to be realised.
Implications for treasurers
In this climate, treasurers have to be aware of many types of regulation, although different companies are inevitably affected in different ways depending on the nature of their businesses. David Stebbings, Director, Head of Treasury Advisory at PwC, points out that the extent to which a company is affected by regulation depends very much on which sector the company is in. “The closer you are to the financial services sector, the more you are affected by regulation,” he notes. The impact of regulatory change will also vary considerably depending on a company’s geographical footprint.
Some industries may be subject to their own diverse and challenging regulations. “I was working with a company that is opening a new facility in China,” says Stebbings. “They have a special team that goes around whenever the company opens a new operation. This team includes a treasury person who makes sure that the company is complying with all of the regulations relating to collecting cash, getting money out and understanding central bank reporting.”
Understanding the challenges
What particular challenges should treasurers be aware of? “Many of the regulatory developments will mean enhanced compliance cost and administrative burdens but could also reduce business flexibility as well as approaches to tax, location and overall business organisation,” explains Wandhöfer. “It will continue to be a challenge to keep all these different developments in sight as well as to assess their impacts, both individually and in conjunction.”
Meanwhile, Doherty notes that the need for safety in the context of their security, liquidity and yield is a key priority for treasurers today. “Treasurers have to manage a greater range of risks, while also demonstrating compliance with their investment mandate, so there is a greater risk management element to the role.”
Wandhöfer adds that because of the challenging economic and regulatory landscape for banks, “corporates will need to maintain a close watch on their banking partners in order to avoid any surprises that could challenge their operations.”
Such surprises could be significant. In recent months, a number of banks have pulled out of certain markets in a phenomenon known as de-risking. In the world of transaction banking, the decision taken by RBS to step back from offering cash management and trade finance services in most of its European markets has been particularly significant.
Doherty points out that technology-related liquidity challenges have increased, and that certain markets and payment platforms are now migrating their infrastructure from batch-based processing to a real-time environment. “This means that treasurers increasingly need to manage cash and liquidity in or near real-time, rather than on an end-of-day basis,” she notes. “While the technology solutions to achieve this may be available, it means that treasury functions need to be much more technologically adept than they have been in the past.”
A master of all trades
In this increasingly challenging regulatory environment, treasurers have also had to acquire additional skills and gain a greater level of knowledge on regulatory topics than in the past.
“They are expected to be treasury experts, but they also increasingly have to be regulatory experts,” says Smith. “This means understanding what is going on in the regulatory landscape and how this will affect not only the company itself, but also the company’s banks. They are expected to be tax experts, as illustrated by the arrival of Section 385, which has a huge potential impact on how treasury functions are organised. And they have to be accounting experts.”