Three Challenges for Corporate Cash Investors in 2013

Abstract

We have identified the acceleration of money market fund reform, the scarcity of eligible investments and the threat of negative yield as three challenges facing corporate treasury professionals in 2013. Our recommendation remains the same as found in previous research – consider a separately managed account as a defensive measure against regulatory uncertainty, supply shortage and yield compression.

Introduction

In the January issue of our newsletters, we often discuss major challenges facing corporate cash investors in the upcoming New Year. First, congratulations are in order to all who successfully navigated through another difficult year of low yield, Eurozone credit crisis and regulatory uncertainty. Looking ahead, we find the landscape in 2013 remarkably familiar to the last. Perseverance is a virtue not to be overlooked.
Our 2012 challenges included the expiration of the FDIC’s transaction account guarantee (TAG) program, less certainty regarding government support for the Government Sponsored Enterprises (GSEs) and a smaller market for financial issuers. This year, we see the acceleration of money market fund reform, the scarcity of eligible investments and the continuation of a low yield environment as three great challenges. While these subjects may not be entirely new to investors, we think the severity of their impact most likely will escalate in the upcoming year.
We continue to believe the confluence of persistent credit risk, the loss of safe havens and the threat to principal from potential negative yield call for strong in-house cash investment strategies, including separate account management.

Acceleration of Money Market Fund Reform

There never is a dull moment in the world of money market fund reform. Shortly after Securities and Exchange Commission (SEC) Chairman Mary Schapiro called off a critical vote by the agency’s commissioners because of a lack of majority support, Treasury Secretary Timothy Geithner sprang to action and persuaded the Financial Stability Oversight Council (FSOC) to issue “proposed recommendations regarding money market mutual fund reform.”
Public opinion remains divided over the merit of the FSOC proposal, which is similar to the one tabled by Chairman Schapiro. Momentum, nonetheless, seems to be building to have reforms passed in the near future, quite possibly before the end of 2013. Of the set of alternatives that currently are proposed, floating the net asset value (NAV) appears to be the favored choice of regulators.
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