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Problems in parking your cash

The low-rate environment and regulatory pressures are the main themes that emerged from a survey on liquidity investment by JPMorgan AM. Companies are finding it increasingly difficult to get a yield on their cash investments and ongoing regulatory changes mean that some companies are turning to money market funds, although SEC 2a-7 rules mean companies are moving cash to governments funds rather than prime funds.

Investment in money market funds (MMFs) is still strong and almost two-thirds (64 per cent) of companies hold investments in stable net asset value (NAV) MMFs, with 22 per cent saying they will increase their allocation. Three-quarters (76 per cent) of companies will continue with current allocation to floating NAV MMFs while 20 per cent will add to that allocation, according to a survey conducted by JPMorgan Asset Management, which gathered online answers from almost 400 CIOs, treasurers and other companies executives.

The Global Liquidity Investment Peer View survey 2017 compares the cash management strategies of companies from the Americas, Europe and Asia-Pacific. It also found that almost half of the companies surveyed plan to change their investment policy in the next 6-12 months due to the evolving regulatory environment, while 82 per cent said it would take a moderate or significant effort to implement a policy change – suggesting that planning should begin well in advance.

The main findings of the survey include:

Investment in money market funds is still strong

More than 60 per cent of respondents will continue to place the same allocation of cash in money market funds. Money market funds and bank obligations account for the majority of cash balance allocations. Nearly 40 per cent of respondents cited MMFs as their chosen vehicle for money moved off a bank balance sheet – by far the most popular placement.

Companies looking to invest are facing regulatory pressures

Money market reform in the US and the approach of reform in Europe, as well as the effects of Basel III around the globe, are some of the challenges facing companies looking to invest cash. In Europe, 44 per cent of respondents said they need more time and/or information before they decide on their preferred money market fund structure.

More flexibility needed for investment policies

Companies are updating their investment policies to ensure that they provide the flexibility needed in the new rate and regulatory environment. Notably, 48 per cent of respondent policies now permit FNAV funds, up from 32 per cent in 2015.

Companies search for yield

Due to the ongoing low-rate environment, investors continue to search for yield and reassess their appetite for risk. Nearly two-thirds of respondents said they would select money market funds for their cash investments if bank deposit rates lag. As they evaluate the impact of negative interest rates on euro – and/or sterling – denominated instruments, a large majority of respondents are considering policy changes to allow increased credit risk, more interest rate risk and the use of currency swaps.

Moving back into prime funds

Only 37 per cent of US-based respondents are currently invested in a prime money market fund, down from 63 per cent in 2015. A majority moved assets to a government money market fund in the wake of new SEC 2a-7 rules.

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