With markets ever changing, a well-written cash investment policy is a must for corporates striving to meet critical cash objectives.

J.P. Morgan’s white paper on developing an Investment Policy ‘A guide to instituting a cash investment policy’ covers the typical investment policy components: scope, objectives, defining tolerance for risk and volatility, assessing interest rate risk or duration risk, assessing credit risk, permissible investments, credit quality, maximum portfolio and issuer exposures, liquidity targets, roles and responsibilities, etc. 

In the introduction J.P. Morgan ask the reader to “please consider the following questions” which they consider are vital in any investment policy:

• are the liquidity and risk characteristics of the policy’s permissible investments understood by the treasury organization, investment committee and board of directors?
• when a security falls out of compliance with the investment policy, what happens? Are there procedures that outline who must be notified? What drives the decision to keep the security or sell it? Who makes the ultimate decision to keep the security or sell it? If the security is kept, how is it tracked and monitored going forward?
• is the portfolio duration tracked (Interest rate duration is a measure of risk that is typically defined as the price sensitivity of the portfolio to a given change in interest rates.)
• does the organisation’s reporting provide the necessary data to update financial reports and senior management on a regular basis? Are the reports timely and FASB and/or IASB compliant?
• is diversification among different security types addressed within the portfolio?
• how are pooled investment vehicles, such as money market mutual funds, evaluated?

Excellent questions from a very useful white paper.