A Global View of Cash Investment
by Nick Jones, Head of Treasury Business Development, Institutional UK HSBC Global Asset Management, and Hugo Parry-Wingfield, Senior Liquidity Product Specialist, HSBC Global Asset Management
Treasurers around the world are approaching a watershed in the way that they formulate cash investment policies and processes. Persistently low interest rates, local and global regulatory and market developments, and changing global cash and liquidity management needs, are placing ever-increasing demands on treasurers. While security and availability of cash will continue to be key investment priorities for corporations, the ways in which treasurers will manage these priorities in the future will undoubtedly change. Consequently, treasurers need to keep informed of global, regional and local investment trends and opportunities, and maintain their investment policies and processes accordingly, in partnership with a trusted asset management partner.
Diverse investment influences
There is inevitably no single factor that is driving change in the cash investment environment; furthermore, these differ within each region and indeed within individual markets:
Globally, as banks progress in their implementation of Basel III before the 2019 deadline, their appetite for different types and tenors of investments will change. This is leading to the emergence of new investment products and more competitive rates for instruments that meet banks’ capital and liquidity requirements. Consequently, investment solutions that may be considered less attractive today may become more compelling and vice versa – indeed there is potential for a disconnect between a company’s need for short-term options to invest surplus cash and a bank’s need for longer-term stable funding.
In addition to Basel III, the development of bank recovery and resolution regimes (such as the Dodd-Frank Act in the United States, and the Recovery and Resolution Directive in Europe - which comes into force in early 2015) means it is no longer sensible to factor in the concept that a bank is ‘too big to fail’.
Developed market governments appear no longer willing to accept putting tax payer money at risk, and whilst arguably the probability of bank default has reduced since the crisis, the size of loss given a default risks rising substantially. It is worth noting also that in some cases a bank’s rating currently includes an implied level of state support, which would need to be revisited if the potential for that support is explicitly removed.
In a world where the concept of ‘too big to fail’ is in question, there are two clear options to manage the risk: robust credit analysis is required to better manage credit risk; and diversification of issuer risk is required to reduce the impact if a default occurs.
Regionally, there are further challenges. In Europe and North America, regulatory reform of money market funds (MMFs) is likely to lead to some changes in the structure of funds that are used by corporate investors, even though there is now some uncertainty about the timing of reforms in Europe since the postponement of recommendations by the European Parliament’s Economic and Monetary Affairs Committee. In addition to regulatory uncertainty, corporate treasurers continue to struggle to find sufficient repositories for cash that meet their investment criteria. These investment policies have often become more rigorous since the global financial crisis, resulting in a declining pool of appropriate investments, exacerbated by constrained market liquidity. The prolonged low interest rate environment further aggravates the dilemma for treasurers, as company boards become more focused on investment returns without sacrificing security or liquidity.
The MMF industry will continue to play an important role in meeting the needs of corporate investors in regions such as North America and Europe where these funds are already well established, even though there may be changes to the way that these funds operate. A key proposal from regulators is the greater use of variable net asset value (VNAV) funds, which have the potential for a small degree of volatility in the fund’s yield as well as the potential removal for a funds ability to pay for the fund to be rated. For these reasons, investors will need to review their investment policies and relevant processes in order to adapt to the new environment.