From the April/May 2012 issue of Treasury & Risk magazine

No Safe Harbor for Cash

When unlimited FDIC insurance comes to an end, a huge wave of corporate cash could make a move. But where will it go?

A perfect storm could be brewing for treasuries with lots of cash. Companies have unprecedented amounts of accumulated cash sitting in bank accounts, protected by unlimited Federal Deposit Insurance Corp. coverage if the accounts don’t earn interest. But the Transaction Account Guarantee (TAG) program that provides this safe harbor is set to expire at year-end. Normally the cash could flow into money-market fund (MMF) accounts, treasurers’ favorite alternative to bank balances, but the Securities and Exchange Commission is weighing new regulations for money funds that many treasury executives say would make them toxic. A huge wave of money could be rolling toward an unknown shore. Safety is not threatened, but moving that much cash requires planning.

Companies have been building cash reserves since the economic crash and credit freeze, notes Anthony J. Carfang, founding partner of Treasury Strategies, a consultancy that tracks the cash buildup. The total has hit $2.2 trillion, he reports, and it continues to grow by 5% each quarter.

“It’s been a huge spike,” Carfang says. “Corporate treasuries have shifted liquidity to their own balance sheets rather than count on bank lines that could be taken away.”

Much of the cash has gone into bank deposits. Before 2008, about 47% of corporate cash was held in money funds and 21% in bank balances, says Brandon Semilof, head of institutional business at StoneCastle Cash Management in New York City, but the financial meltdown flipped those numbers. The big driver was “absolute safety,” he says, as companies sacrificed direct yield to get complete protection and take advantage of banks’ earnings credits (ECR) to pay for services. Now that 26-percentage-point gap reflects “hot money” that could leave banks in a hurry. “There’s a huge cloud of uncertainty about how corporations should manage cash and liquidity,” he says. “It’s definitely getting more attention at the treasuries we talk to.”

“Barring new regulation, the money that flowed out of money funds into bank deposits will flow back to money funds once the insurance guarantee expires,” says Jeff Jellison, CEO for North America at ICD, a global money market fund trading and risk management company.

“We know that nearly $600 billion went to the major banks in 2011 as domestic non-interest-bearing deposits rose 34% to take advantage of the unlimited FDIC insurance,” Jellison says. “Nearly all of that should come back to money funds, especially since the 2010 2a-7 regulations have made money funds more liquid and transparent, providing new exposure analytic tools.”

But new regulations the SEC is considering could take money funds off the table for some treasuries. “The floating net-asset value (NAV) being contemplated by regulators has moved us to consider alternatives to money market funds because floating NAV will impact accounting for MMF instruments,” says James Haddad, treasurer and corporate vice president of finance at Cadence Design Systems in San Jose, Calif. “If we are going to be forced to a daily mark-to-market, recording a gain or loss on principal, we will look at broader investment opportunities but continue our focus on principal preservation.”

Cadence’s new strategy is taking shape. “We are planning to reallocate 20% of our investment portfolio to an outside manager where we broadly set investment parameters to minimize risk we deem unacceptable,” Haddad reports. “If this strategy proves successful, we’ll consider higher allocations in the future to this choice and away from MMFs. If a goal of regulators is to reduce MMFs as a source of liquidity for issuers while denying investors a principal-protected investment, they will be achieving this goal.”

The SEC is also considering requiring funds to hold more capital and placing limits on fund redemptions.

“Any kind of holdback would be a deal killer for our members,” says Brian Kalish, finance practice lead at the Association for Financial Professionals. “Philosophically, they can accept floating NAV, but the accounting could be a huge operations headache. Higher capital requirements for the funds would simply mean lower yields.”

No one knows what to expect from the SEC at this point, Kalish says. “They could put restrictions on prime funds but not on Treasury or government funds, in which case corporate investors might move their cash to Treasury and government funds.” If unlimited FDIC insurance disappears and money funds have redemption restrictions, corporate treasuries would use managers for separate accounts or buy securities directly, he predicts, and “the vast majority of our members don’t want to spend scarce time directly managing cash investments.”

Capital Advisors Group in Newton, Mass., and Strategic Treasurer in Atlanta are surveying treasuries about how they plan to cope. Early responses indicate that “awareness of the coming changes is growing,” notes Ben Campbell, Capital Advisors’ president and CEO, “and action plans are being prepared.” The preliminary consensus seems to be that reaction to the end of TAG will be significant, with money moving out of bank accounts and into money funds, separately managed accounts or direct purchases of government bonds. How much goes in or out of money funds depends on what the final regulations look like, Campbell reports.

If a tsunami of corporate cash suddenly moves out of bank accounts and money funds into separately managed accounts around the end of this year, it won’t swamp the system, Carfang says. Money funds already have asset managers on staff, and the structure for separately managed accounts is already in place.

“If that’s what corporate cash investors want, that’s what investment houses will offer,” he says. “The change would be largely technical.” Separately managed accounts could mimic the investment policies of the money funds but would be less regulated and, therefore, more flexible but less efficient. It would be a good idea to talk with investment managers ahead of time about what they will offer, he adds.

Of course, treasuries could choose their own securities and run their own portfolios, but many don’t have that expertise on staff and building an in-house portfolio of securities like commercial paper could be a challenge. “The supply is such,” Carfang points out, “that it would be hard for most companies to build a sizable portfolio that is both liquid and diversified.”

Carfang, who is plugged into the asset management world, reports, “We’re hearing from asset managers that they’re getting more questions from cash investors about private accounts and about adjusting their investment policies to improve return, but so far, this is mostly talk. We’re not seeing money move yet.”


For a look at how much cash companies are holding overseas, see Offshore Cash Hoards Expand.

For a discussion of the impact of the end of Reg Q, see Reg Q Wipeout.

And for more on treasurers’ attempts to bolster their returns on cash investments, see The Hunt for Short-Term Yield.


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