Changing Regulations – Changing Investments

Results from the Capital Advisors Group/Strategic Treasurer 2012 Liquidity Risk Survey, to be released later this month, portend the shifting regulatory environment will significantly impact investment vehicle preferences for corporate cash managers. The survey results remind us that changing regulations can be a major catalyst in modifying investor behavior. After the Lehman bankruptcy, regulators deployed credit and liquidity safety nets that served to stabilize cash instruments during a very difficult time. First, money market funds were guaranteed under the Treasury Department’s Temporary Guarantee Program and, shortly thereafter, FDIC coverage was expanded to fully insure non-interest-bearing transaction accounts. These programs effectively turned bank and prime money fund exposure into Government credits and helped stabilize the transactional cash market. The FDIC program also allowed banks to award earnings credits to offset bank fees for corporate depositors while maintaining the unlimited FDIC coverage. As the markets recovered, regulators started the process of unwinding these programs so that investment risks once again could be shouldered by the investor. First, the money fund guarantee expired uneventfully in September of ’09, and, after being extended twice by the Treasury Department, the unlimited FDIC coverage for non-interest-bearing accounts is set to expire in December. Unlimited FDIC coverage now falls under the umbrella of the Dodd-Frank Act and an act of Congress would be needed to further extend its expiration date. As investors process these changes, they also face potential reforms in money market funds which may affect their utility and yield.

With regulatory changes likely to impact two major investment channels, what additional options should Treasurers consider for their corporate cash? Understanding that the directive of cash managers is to minimize and diversify risk and to preserve liquidity while pursuing market returns, we believe the best combination of risk control, liquidity and return may be found in separately managed accounts. Widely adopted by corporate Treasurers for years, a separately managed account gives investors control over their investment policies and liquidity needs. Advances in technology over the years allow for streamlined reporting and daily risk transparency, which provide a level of customized risk control and diversification unavailable in money market funds or uninsured bank deposits. We have been managing separate account solutions for corporate Treasurers for the past 21 years, and we believe that separately managed accounts, whether running 45-day average maturities or 450-day average maturities, have provided significant benefits to those seeking control of diversification, liquidity and return. With so many regulatory changes expected by year-end, this month’s research takes a fresh look at the advantages of separately managed accounts.

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Best Regards,

Ben Campbell
President & CEO