New Year, New Challenges
The New Year has a way of prompting us to focus on priorities and agendas for the coming 12 months and as Treasurers plan their “To Do” lists for 2012, it is helpful to identify trends and events that will shape the short-term cash management environment. A view of the potential issues that could develop in the New Year may prove valuable and may perhaps help to preempt credit or liquidity difficulties that might arise as the year progresses.
For 2012, changes in various government programs, as well as regulatory developments, can be foreseen with enough clarity that we believe now is the time to evaluate strategies to address these changes. For example the FDIC’s unlimited insurance coverage for Bank DDA accounts is scheduled to revert to the $250,000 limit on December 31, 2012. This event has the potential to upend the popular strategy in which Treasurers who utilize these Bank DDA accounts receive the FDIC’s principal guarantee in combination with positive returns through earnings credits, some as high as 50 basis points. This development also has the potential to expose investors to BBB/P2 credit risk in financial credits and is, in our view, one of the largest challenges that Treasurers will face in 2012.
Another challenge we foresee for Treasurers in 2012 relates to the November 7th remarks by SEC Chairman Mary Schapiro who said that the SEC soon will propose new rules for money market funds that include capital buffers, redemption restrictions and/or a floating NAV. The take away from Ms. Schapiro’s remarks is that we are highly likely to soon see structural changes to money market funds which potentially may impact their returns and which most likely will change how Treasurers use money market funds in their liquidity mix.
The third change that may impact Treasurers in 2012, although minor in our view, will be potential shifts in capital support for the GSEs – Fannie Mae and Freddie Mac.
The June 2011 Liquidity Survey conducted by the Association of Financial Professionals which examines corporate cash positions, cited the percentage of corporate cash invested in bank deposits at 42.4%, in diversified money market mutual funds at 19.1% and in agency securities at 4%, for a total exposure to the three sectors at 65.5%. Given that the above issues affect nearly two-thirds of corporate cash, these three topics should warrant high priority on the agendas of corporate Treasurers in 2012.
An examination of the issues and forethought on possible alternative strategies should be on the top of the “To Do” list of anyone with cash oversight responsibilities. Solutions could be as straightforward as sourcing a portfolio of securities that map to one’s desired diversification, credit and liquidity needs. For more than 20 years, our Separate Account Management services have been doing just that – so we would urge all who haven’t already addressed the upcoming challenges to consider Capital Advisors Group’s Separate Account Management offering as a solution.
As we look forward to the New Year, we thought we would start by examining these challenges in greater detail and we encourage you to review our research paper entitled, “Three Challenges for Corporate Cash Investors in 2012.” This year appears to be setting up as a dynamic one for corporate cash investors and I look forward to helping you address the challenges.
Best Regards,
Ben Campbell
President & CEO
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