Maintaining Liquidity in Corporate Cash Accounts

Abstract

Separate accounts may offer greater return and reduced credit risk compared to prime money market funds. By examining current and future liquidity needs and the potential for significant deviations from cash flow projections, corporate treasurers may construct portfolios with direct investments in high-quality credits that satisfy current, future and emergency liquidity needs – and still may achieve higher returns than money market funds while eliminating the shareholder risk of pooled vehicles.

Introduction

Events of the past 6 years have shriveled yields for deposit and money market products, while at the same time increasing investors’ risk of both principal loss and interruption in liquidity. This year the SEC is expected to make a final ruling on the direction of Rule 2a-7, which could materially alter the utility and the yield potential of money market funds by introducing floating net asset values, liquidity gates, or some combination of both. Corporate treasurers who traditionally have maintained all of their cash in bank deposits or overnight products may be forced to examine other options to maintain a competitive (or merely positive) return and avoid incurring inappropriate concentrations of credit risk. A major hurdle in this process is satisfying the need for daily liquidity given businesses’ varying degrees of clarity with respect to future cash needs. Fortunately, with a carefully planned maturity structure and an organized strata of liquid investment vehicles, separately managed account portfolios (SMAs) can offer a high degree of liquidity that may satisfy most treasurers’ requirements.
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