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Liquidity Insights: past challenges and upcoming headwindsLiquidity managers faced significant challenges in 2011. Interest rates remained at historic lows, limiting investment returns as well as investment choices. Regulatory changes within the finance and healthcare sectors were aggressive, confusing and burdensome to follow. In addition, instability and government downgrades created uncertainty in the European markets. These factors collectively fuel headwinds to come.

Past challenges set the stageDodd-Frank Act yields new interest optionsImplementation of the Dodd-Frank Act expanded liquidity options when Regulation Q was formally repealed on July 21, 2011. This regulation prevented business and commercial checking accounts from receiving interest. The repeal did not require action on the part of companies or financial institutions; however, many banks proactively created new depository products in order to provide interest-bearing checking account options for business and commercial clients. As a result, these new products increase the breadth of solutions available for liquidity managers looking to diversify their operating cash.

S&P downgrade has little e�ectOn August 5, 2011, Standard & Poor’s downgraded the U.S. credit rating for the first time in history—from AAA to AA. While politically noteworthy, the downgrade has resulted in very little impact to the liquidity market. Largely overshadowed by the continuing European debt crisis, the downgrade occurred at a time when interest rates were so low that inflation was not a possibility and no ripple e�ect was felt. United States Treasury securities are still considered some of the safest in the world, and the downgrade has had no e�ect on the United States’ ability to borrow.

MMF Reform influence yet to be realized Also significant in 2011 was the final compliance integration of the Money Market Fund Reform. This reform provides investors with greater clarity into money market mutual funds (MMMF), while introducing new restrictions on liquidity and asset quality. When the interest rate environment does begin to lift, it will be especially interesting to track MMMF performance and the actual impacts of the reform.

> March 2011Upcoming headwindsAs we move further into 2012, liquidity managers should be aware of the upcoming headwinds in the regulatory, liquidity management and mutual fund arenas.

Impending regulatory challenges, BASEL IIIWith respect to regulatory challenges, the largest known impact to the liquidity management environment in 2012 will surface with the adoption of BASEL III by financial institutions. As significant as the Dodd-Frank Act on an international scale, this regulation seeks to establish global regulatory standards and is poised to change capital and liquidity levels, introduce new calculation techniques and reshape the financial sector. The calculation techniques change how financial institutions value their liquidity and will present the drive for stable deposits with deeper client relationships. Further, the new requirements are positioned to force a decrease in credit availability. This may impact the requirements and parameters for credit extension to only the most strategic business opportunities.

On January 25, 2011, the Federal Open Market Committee (FOMC) set expectations for the federal funds target rate to remain at the historically low range of 0.00 percent to 0.25 percent through the end of 2014. This decision is meant to support a strong economic recovery and help control inflation. The FOMC was not unanimous in their decision, resulting in speculation around the actual time frame for rate recovery. Without question, the historically low interest rate environment will continue to be a factor that must be addressed in liquidity management for several years to come.

MMF Reform uncertainty Controversy also still surrounds the framework of the Money Market Fund Reform. Highlighted in the original reform, was the elimination of the $1.00 stable Net Asset Value (NAV) and the requirement that MMFs adopt a floating NAV. While the SEC has entertained negative feedback from institutional investors and industry experts, the floating NAV still remains a topic of discussion. If implemented, market professionals have warned that floating NAV funds could deter or discontinue the use of money market mutual funds entirely.

Chart a course: Three elements of successful cash flowKeep in mind that understanding, strategizing and planning your cash flow dynamics is the best preparation for dealing with the headwinds of 2012 and beyond. Successful cash flow can be broken into three di�erent dynamic categories and managed accordingly. These include operating cash (daily use), working capital (weekly to monthly use) and investable assets (used less frequently than one month). By understanding the specifics of your cash flow dynamics, you will be able to maximize your cash flows and minimize risk.

Revisit your investment policy statement Finally, do not underestimate the value of your investment policy statement. Serving as the glue that clearly holds the liquidity structure together, it is one of the most important operating documents for an organization. The liquidity policy promotes consistent decision methodology while clearly highlighting the desires, risk tolerances and investment needs of the company. If your company does not have an investment policy statement, consider working to develop one as soon as possible. Templates are available and the policy does not have to be overly complex, it simply defines the objectives of your unique liquidity structure.

If you would like more information, or would like to discuss development of an investment policy, please contact:

Jason Sweatt, CTP Vice PresidentLiquidity & Deposit ConsultantRegions BankJason.Sweatt@regions.com