Preparing for Changing Interest Rates: What Will it Mean for Corporate Cash Managers?

The US Federal Reserve Bank recently announced the largest increase in corporate cash flows quarter over quarter since 2009. As a result, there is a ‘tapering’ now underway of central banks’ monetary policies, signaling the beginning of the end of the low interest rate environment and quantitative easing (QE) in North America that have prevailed since late 2008.

The past three years in particular have seen major changes of emphasis among treasurers’ priorities and investment goals.
SunGard’s third annual corporate cash management study
(October 2013) highlighted that these shifts were often in direct response to economic, regulatory and industry events. In 2011, the need to enhance processes such as cash flow forecasting and liquidity management dominated the treasurers’ agenda.

The following year emphasised market and regulatory issues, with 2012 marked by the eurozone sovereign debt crisis and in the US the expiration of the Transaction Account Guarantee Program (known as TAG), which guaranteed US$1.5 trillion in non-interest bearing accounts above the Federal Deposit Insurance Corporation’s (FDIC) general limit of US$250,000.

In 2013, treasurers were challenged to unlock trapped cash in different jurisdictions and to find suitable repositories for large cash balances following the expiration of TAG at the end of 2012. According to the SunGard study, the most popular investment instruments continue to be bank deposits, used by 74% of survey respondents with an average of 57% of their cash held in these deposits. At the same time a growing number of companies are investing in money market funds (MMFs).

The current low interest rate environment and regulatory uncertainty have driven corporate treasurers to seek diversification and alternatives in their short-term investment portfolios, while also looking for opportunities to maximise yield and automate manual processes. Treasurers are seeking more investment options, operational efficiencies and risk analysis tools, and as we eventually move towards a more normalised rising rate environment these requirements will be amplified.

As rates rise, treasurers will expand their use of direct securities such as commercial paper, certificates of deposit (CDs) and bank deposits. This diversity in investment vehicles will require greater visibility into price discovery, ability to manage and mitigate risk, and compliance with investment policy guidelines while searching for yield.

Balancing Short and Longer-term investments

Treasurers will look to expand into different asset classes and durations to manage interest rate exposure. Even when MMF rates rise, longer-term investments will also be higher, but when it comes to operating cash, liquidity and principal protection will remain paramount; therefore, it is doubtful that investors will take much more duration risk in this environment.

This trend is demonstrated in SunGard’s 2013 cash management study, which found that treasurers remain highly conservative in their investment strategy, even more so compared to 2012. Nearly half (46%) insist on immediate access to all cash, an increase of 4% from the 2012 study. With continuing low yields, it is understandable that treasurers are not yet prioritising yield alongside security or liquidity.

The study also found that 43% of companies had increased the amount of surplus cash over the past 12 months, more than a third of which had seen a significant increase, which is also comparable to 2012. Companies may hold on to liquid cash for many reasons, such as fueling working capital financing and for strategic investment such as mergers and acquisitions.

Growing need for Analysis and Decision Support

With an expanded mix of asset classes and maturity options, investors will need risk and performance analysis tools at their disposal to make more informed decisions. Treasurers may choose separately managed accounts to reach further out on the curve with the help of an investment advisor, opt to invest overnight in short-term investments, or go with a medium-term instrument such as a CD for several months. More than likely a treasurer’s strategy could include a combination of all three.

The use of a single, independent platform that manages all short-term investments can provide treasurers with many advantages in any rate environment. Companies are increasingly recognising the benefits of electronic dealing portals for control and efficiency of operations and reporting, independent price discovery, and counterparty risk analysis all through a single channel while managing activities within investment policy guidelines.

According to the SunGard study, only 30% of short-term investments are now conducted via telephone – a substantial fall from the 51% in the 2012 study – and there is now a general preference for independent portals. It is highly likely that the trend towards electronic dealing platforms will continue as more of these portals add additional asset classes and tools to help cash managers aggregate their portfolios on one solution.

In an environment in which the timing and impact of future events are difficult to predict with absolute certainty, treasurers will be best served by flexible investment strategies and employing tools that not only support this need for flexibility, but also offer the risk visibility and analysis for making the best investment decisions that ultimately will help drive their organisations forward.

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