With money market fund reform underway around the world, corporate treasurers are facing new challenges. What will the changes mean? What are the risks and above all what will it mean for corporate treasurers themselves?

Money market funds (MMFs) have long been an attractive proposition for treasurers, often used as a short-term investment vehicle. There are many reasons for this including liquidity, their credit rating and their impact on the diversity of the investment fund.

To begin with, they offer daily liquidity. If faced with cash-flow problems, they provide the flexibility which treasurers may seek in such circumstances. Secondly, their triple A rating makes them more attractive than many bank products. Finally, the spread of instruments means that they are useful for treasurers seeking to broaden the diversity of investment and secure their risk management targets.

This means that MMFs are more attractive than time deposits or cash balances within the investment portfolio, offering a better yield and greater flexibility, the holy grail for treasurers.

So why did authorities in the USA and Europe decide that they needed to look at MMFs and draw up reform plans?

After the financial crisis of 2008, the impact on the Reserve Primary Fund in the US meant that there was a run on MMFs, and regulators felt that they had to strengthen them. One of the major repercussions has been a significant change in the measure of the net asset value. Previously, funds had to maintain a constant net asset value (CNAV) in the US they now must apply a variable net asset value (VNAV).

This has led to treasurers exiting MMFs, with a significant number of corporate treasurers saying they have little or no intention of returning to them any time soon.

After viewing the reaction in the US, European regulators are taking a different approach. Two new categories are posited, Public Debt CNAV funds and low volatility net asset value (LVNAV) funds.

Treasurers have been relieved that the option means that many of the CNAV MMF assets will now transfer to LVNAV MMFs. The proposals mean that a better balance has been achieved in Europe than the US, balancing the needs of regulators and investors alike. The new category of non-government LVNAVs seems to have met the recommendations of national regulators and the objectives of corporate treasurers in one fell swoop.

Concerns over the continuation of credit ratings on MMFs have been alleviated. This means that treasurers can continue to distinguish between their investments.

The time-lag on the introduction of European reforms means that treasurers have had time to experiment with different kinds of MMFs and inform internal committees of any change in investment strategy. With interest rates remaining low across European markets, this is a good time to try out new products, as cash and liquidity are continually assessed in the current climate.

When looking at VNAV funds, yields are monitored far more frequently and this may well be the case with LVNAVs. This can be easier if treasurers stick with their original providers. This means that they may be given a heads-up prior to a fund changing to a LVNAV.

Treasurers remain happy with the prospect of LVNAVs and their ability to help with liquidity, and the fact that there is a 20-basis point cushion before mark-to-market is triggered.

As far as public debt CNAVs are concerned, although they may initially offer a lower yield, there may be some funds which offer a better return on investment. This will mean trawling through offers to help balance the investment fund.

What is clear is that it is still early days and thus difficult for treasurers to get a handle on how these funds will perform. It is only in the wake of full implementation of the legislation that a clearer picture will emerge. The working assumption remains that most providers will transfer CNAV funds to LVNAVs.

Industry sampling suggests that corporate treasurers still feel they need more time and information before they can make recommendations as to how to structure their MMFs. Most feel that reform will not present such problems that MMFs lose their popularity, but time spent researching the regulator’s plans and actions will be time well spent.

Simon Lynch is the owner of Treasury Talent

Treasury Talent is a specialist treasury talent provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering Caifornia and the USA. To make contact simon@treasurytalent.net