Corporate Treasurers, Treading Carefully Amid Regulatory Landmines

The world of corporate treasury management has of late had to focus especially hard on the management portion of the job description. And with good reason, as a slew of regulations, spanning Dodd-Frank, Basel III and the money market Rule 2a-7 reform, have kept treasurers on their toes mastering the devils that lie within the details.

Regulatory frameworks for the above mandates are never one-size-fits-all. Dodd-Frank, for example, deals with financial institutions and the people who use them; Basel III deals with risk management; the money market reform centers on finding conservative holdings and credit ratings.

In a nod toward the everyday complexities of treasury activities and oversight, Institutional Cash Distributors (ICD) has offered up its latest ICD Intelligencer, which is subtitled “Navigating the New Treasury Investment Era.” The reference work, says the company, helps inform treasury and risk professionals about technology and workflow, with an eye on trading, risk controls and compliance.

To be blunt, this isn’t your grandfather’s money market anymore. The regulations that are only a few years old in the wake of the financial crisis are already having a significant impact on liquidity, with several investment vehicles held by respondents to the AFP Liquidity Surveys conducted in 2014 and 2015. The average number of investment vehicles held by corporate treasury departments grew from 2.8 two years ago to 3.2 last year among those with more than $1 billion in annual revenues. ICD cites institutional prime money market funds as being the most popular of investment vehicles for its clients on the merits of low risk, relatively high liquidity and competitive yields.

One key overarching theme: Bank deposits and prime money market funds are a cornerstone of corporate treasuries, yet the regulations mentioned above are enough to make even conservative holdings call for active management. Core guiding principles, according to ICD, focus on diversification and also hew away from variable net asset value (VNAV) money market funds, which price shares out to more than two decimal places and can introduce volatility into returns. There are also liquidity concerns to monitor (and liquidity can be skewed by the variable net asset money market funds).

One salve exists in the form of technology, which ICD says is one facet of its new offering. Through portals, such as those that show gains and losses, tax implications of portfolio management can be pinpointed, mulled, executed and tracked, especially as concerns the IRS and U.S. Treasury proposed Simplified Tax Accounting Method for VNAV funds.

Treasury professionals must also take into account timing and settlement of trades, where ICD says a new model has been emerging, with many funds trading at 9 a.m., 12 p.m. and 3 p.m. in the trading day, which also means that there are three separate settlement times demanding attention (and there are after-hours trades as well and considerations tied to early redemptions on subsequent days).