Understanding cash management benefits for corporate finance

Corporate finance departments need their treasurers to understand the modern nature of cash management. David Rothon of Northern Trust explains how products have evolved and why being fully aware of risk can offer alternatives to traditional banking solutions.

Ever since the financial turmoil began in August 2007, investing in the money markets has been extremely challenging and now a renewed importance has been placed on capital preservation especially in the world of corporate finance.

The heightened uncertainty has amplified investor nervousness as low growth and high inflation threaten to wreck havoc on capital markets aided by bank write downs, de-leveraging and a reduction of risk appetite in both credit and equity markets.

The interbank market, where money market funds operate, is still showing signs of distress with distrust amongst banks in lending to one another continuing to cause a dislocation in Libor levels, not helping business finance or institutional investors.

This may paint a volatile and gloomy landscape but money market funds still provide a relatively safe haven, especially AAA-rated money market funds.

By taking a step back to understand how the money market universe has developed over the last decade, it can be seen that ongoing regulatory changes in the US and Europe, as well as the increasing complexity of corporate cash management, the treasury function, have fuelled a dramatic growth in assets under management in the industry.

Attractive alternative to bank deposits

Money market funds offered an attractive alternative to traditional bank deposits, providing diversification, off-balance sheet exposure and access to active investment strategies without sacrificing liquidity. As the demand for such products increased so did the variety. The result was that an industry traditionally viewed as a conservative safe haven for cash actually became home to a multitude of disparate strategies ranging from very low risk government treasury funds to more volatile enhanced 'cash plus' vehicles and short duration bond funds.

Continued on next page