As Corporate Treasurers Seek Security and Liquidity, MMFs and Portals Grow in Importance

Since the financial crisis of September 2008, treasurers have increasingly recognised the importance of defining and delivering on the right investment policies. Treasurers need to find appropriate repositories for their cash and maintain access to liquidity in an environment where borrowing continues to be expensive and difficult to source.

The problem of finding appropriate repositories for cash is compounded by the need to maintain access to liquidity in an environment where borrowing is more difficult and expensive. Furthermore, with interest rates remaining at a historic low, treasurers and cash managers are tasked to generate a return on cash to prevent value erosion through inflation and rising prices.

Corporate Cash Continues to Rise

Corporate cash in the US remains at historic levels, fuelled by the Federal Reserve’s monetary policies that injected nearly US$900bn into the market and reduced the cost of long-term borrowing. In March, the Fed reported that corporate cash balances continued to grow last quarter to US$2.23 trillion, an US$845bn increase since Q109.

However, growing concern with increased regulations, including possible money market fund (MMF) regulations, is creating uncertainty and a drive toward large cash balances. Industry analysts report that companies are beginning to use their cash for capital investment, acquisitions, increasing dividend pay-outs and funding share repurchase programmes. A recent USA Today article says: “Last year, companies in the Standard & Poor’s (S&P) 500-stock index spent US$404.2bn to buy their own company’s stock, nearly double the amount back in 2009.”

To support this trend, algorithmic trading and execution solutions can help institutions and corporations trading US equities, for example, to help manage share repurchase programmes, innovative algorithms for corporations conducting 10b-18 programmes to buy back their own shares. These solutions incorporate custom algorithms per stock to help ensure corporations buy back as many shares for each dollar the board authorises in a fully transparent and automated fashion.

But it is this volatile and fragile economic environment that will drive a greater need for a robust, diversified cash investment policy. As corporations reach capacity with their approved counterparties for bank deposits, MMF investments are growing on a global scale.

Growing Importance of MMFs

A recent SunGard corporate cash investment study indicated that while the general inclination among corporates is to continue with their existing investment strategy, the growing importance of MMFs is emerging among corporate treasurers in their future investment strategies.

The study, which collected responses from 215 treasurers and cash managers at corporations across a wide range of industries and geographies, found that bank deposits are still the most popular investment type for 67% of respondents, followed by MMFs which are used by 48% of respondents. While bank deposits will continue to form the mainstay of corporate investment policy, with more than 60% of respondents noting the importance of bank deposits in the future, this represents a drop by more than 6% from today’s levels as the number of approved counterparties declines. Furthermore, among the 48% of respondents using MMFs, more than half identified them as an extremely important part of their future investment strategy, representing an increase of more than 6%.

The study also highlighted the reasons why MMFs were not currently being used due to concerns regarding credit quality, liquidity and yield. Coincidentally, these are among the benefits of using MMFs as they comprise a diversified range of high quality assets, rigorous investment policies and credit research, and same-day access to liquidity. Therefore, it seems likely that many respondents who have these concerns are largely unfamiliar with MMFs.

Regional Differences

While investors in the US and the UK have great familiarity with MMFs, standard definitions and availability of MMFs in Europe and Asia are now driving increased adoption, particularly as fragile economic conditions will demand diversified cash investment policies.

While MMFs are growing in importance globally, there are some differences in their relative degree of importance in different regions. According to the SunGard study, MMFs have the most strategic importance in the UK, followed by the US, both of which have the longest history of MMF investment. MMFs were first introduced in the US and quickly taken on by investors in the UK, so there is typically greater familiarity with these instruments than in other regions. In addition, investors in the US have long appreciated the value of a standardised investment product that 2a-7 funds offer.

Figure 1: Future Importance of MMFs by Region

Source: SunGard’s Corporate Cash Investment Report, February 2012


In Europe and Asia, MMFs have only been introduced more recently, accounting for their lower significance historically, and in some cases, less familiarity. Furthermore, there has been some ambiguity in the definition of MMFs in the past: various types of funds with quite different risk profiles have been described as MMFs. This has now changed with standardised definitions of MMFs and short-term MMFs. This standardisation is encouraging greater adoption.

Risk Versus Yield

Although the yield of MMFs has been fairly limited since 2008, treasurers can use MMFs as part of their risk management policy to protect their assets. Security and liquidity are two of the main drivers of investment policy today and will remain so going forward. These are the key strengths of MMFs, specifically when looking at the US dollar net asset value (NAV) and the daily liquidity, as well as the ability to manage underlying risk.

In addition, as yields have gone down, corporate treasurers are placing much greater emphasis on processing efficiencies. One of the values of investing in MMFs is the internal efficiencies that they offer. The costs associated with processing an MMF trade, and the knowledge that the processing will go smoothly, provide a tangible value for treasurers.

The Rise of Automation

One of the most significant investment challenges faced by corporate treasurers and cash managers today is the ability to forecast cash flow accurately. Market liquidity constraints and the need to gain transparency around counterparty, sovereign and liquidity risks are driving demand for automated solutions.

As familiarity and confidence with MMFs gradually increase, more companies are likely to take advantage of the visibility, automation and auditability that MMF portals offer. The capabilities of online MMF portals have developed considerably in recent years, providing not only transaction capabilities but also visibility over fund metrics and asset allocation, and risk analysis tools for analysing and managing both interest rate and counterparty risk. The number of funds available through some portals is also growing, providing a wider range of choice for users.

An Important Role to Play

During a period of continued uncertainty, defining and delivering on the right investment policies with an emphasis on counterparty stability and access to liquidity will remain extremely important for corporations globally. In this environment, combining internal initiatives to optimise cash management, and investing in secure, liquid and diversified instruments, such as MMFs, would appear to be a strong example of industry best practice.

As fluctuating market conditions continue, along with the expectation that the range of investment opportunities will increase when interest rates eventually rise, treasurers recognise that market conditions are not the only factor in improving investment performance. Increasingly corporates are seeing the value of initiatives to unlock cash that is ‘trapped’ in subsidiaries, enhance forecasting, and concentrate cash more effectively.

In the meantime, corporate investment policies remain conservative with a focus on security and liquidity, where the use of MMFs and online portals has an important role to play in providing high credit quality, diversification of assets and counterparty risk, and automated tools for optimising short-term investment strategies. Portals are also evolving to include risk analysis and compliance policy tools, providing corporate treasurers with actionable credit and counterparty data to help increase transparency, make critical investment decisions, reduce risk and exposure, and improve operational efficiency.


Related reading