From the September/October 2012 issue of Treasury & Risk magazine

Despite Reprieve on New Rules, Money Funds Lose Their Luster

Treasurers look at other investments; ECRs may keep companies in demand deposit accounts.

The Securities and Exchange Commission threw in the towel on tightening regulations on money-market funds in August, although regulators have a number of options to continue the fight. Still, money funds' role as one of the main havens for corporate cash may have passed.

Companies’ use of money funds appears to be waning. Ben Campbell, president and CEO of Capital Advisors Group, says the SEC’s Rule 2a-7 effectively reduces the weighted average maturity of money fund investments to 60 days, and in practice maturities are now under 50 days. That’s down from an average of 90 days prior to the financial crisis and 120 days before 1991, Campbell says, and puts money fund yields at about 0.1%.

“Our conclusion is that [treasury executives] are going to consider a wide variety of investment channels outside of traditional MMFs,” Campbell says.

A recent Capital Advisors survey showed treasurers expect to shift short-term investments to government securities, commercial paper and separate accounts. A third expect to decrease their use of demand deposit accounts (DDAs), likely prompted by the expiration of the FDIC’s unlimited deposit insurance at year-end.

Even with the change in deposit insurance, however, DDAs may prove attractive. David Neshat, treasurer at Cambridge, Mass.-based Akamai Technologies, a cloud platform provider with $1.2 billion in 2011 revenue, says his company keeps sufficient cash in a DDA at its cash management bank to satisfy its daily liquidity needs. The earnings credit rate (ECR) Akamai receives to offset bank service charges “is today on a net basis higher than the return on any [money fund] out there,” Neshat says.

Akamai’s need for short-term liquidity closely matches the amount it must deposit to receive enough ECR to offset all of its bank fees. If a company’s short-term liquidity needs exceed that “sweet spot,” money funds are the remaining option for investing cash that must be available on short notice.

Had the SEC’s proposal to require funds to switch to a floating net asset value been approved, the money-fund option likely would have become less viable for treasurers, Neshat says, since a floating NAV introduces the risk of capital losses.  “After all, we are managing shareholders’ cash, and our first objective is to preserve principal.” 


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