As regulatory reform is implemented in the US and is being discussed in Europe, investors must now weigh their cash options by prioritizing stability, liquidity and return. In this new era of liquidity, all three factors may not be available in a single investment option.
Following the global financial crisis, regulators and legislators across the globe, began rethinking cash investments. As a result, the cost of capital preservation has changed for investors.
Global central bank policy, and more specifically, quantitative easing, has pumped unprecedented amounts of reserves—in the trillions of dollars—into the banking system. Central bank rates remain at historic lows, impacting the potential returns on traditional liquidity products such as short term cash deposits.
Basel III was introduced to improve the banking sector’s ability to absorb shocks as a result of financial or economic stress. Basel III is meant to bolster liquidity and capital requirements for the banking sector. Financial institutions must implement the components by 2019. Regulators worldwide are implementing with faster timelines, increased minimum standards and significantly higher requirements for systemically important institutions. Accepting short term cash deposits onto bank balance sheets is becoming challenging.
Investors have historically favored prime over government-only money market funds, due to the higher yield potential. In late 2016, the Securities & Exchange Commission (SEC) is enforcing changes to money market funds based on type of fund and investor. As a result, in mid-October 2016 non-government money market funds will be subject to liquidity fees and redemption gates. A floating net asset value per share pricing for institutional prime and institutional municipal funds will also be in effect.
While negative interest rates, the implementation of Basel III and monetary policy, such as Quantitative Easing, have been the dominant concerns for European investors, money market fund reform is on the horizon. The European Union legislative bodies have been working toward an agreement on reform of the 500 billion Euro industry, which would potentially divide government and prime funds in a manner similar to the US. An agreement between could be reached as early as the third quarter of 2016, but implementation would take a minimum of two years.
Traditional cash investments may not be available, work the same way or offer competitive returns—even as rates rise. Individual and institutional investors must look at the entire spectrum to prioritize their investment objectives.
Source: GSAM. For illustrative purposes only. Liquidity, performance and risk characteristics of actual funds will vary. When considering a fund, please see the prospectus for additional information. Potential Risk represents the potential for liquidity risk which is comprised of implied term, lockup of investment and diversification of holdings. GSAM offers products across the liquidity spectrum. Please see additional disclosures in the back of the document. Implied term refers to the period of time an investor is expected to hold an investment, even if not legally required to do so. For example, term deposits are bank deposits with a required period before an investor can receive their cash. However, short duration bond funds or bond funds, although lacking a requirement holding period, are rarely used for daily liquidity purposes. Lockup of investment refers to a period of time in which an investor cannot receive their cash back. For example, a 3 month term deposits are bank deposits with a required 2 month period before an investor can receive their cash. Treasury money market funds include holdings of government securities issued by the United States Department of Treasury. Tax Exempt money market funds are designed to maximize current income, preserve capital and maintain liquidity, by investing in municipal obligations issued by or on behalf of states, territories and possessions of the U.S. The interest is exempt from regular federal income tax. Government money market funds invest in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash Prime money market funds primarily invest in corporate debt securities are referred to as prime funds. Ultrashort Duration bond funds are mutual funds that generally invest in fixed income securities with extremely short maturities, or time periods in which they become due for payment. Term Deposits are deposits in an interest-paying account that requires the money to remain on account for a specific amount of time or term. Term deposits may contain counterparty risk of the bank issuing the term deposit. Diversification does not protect an investor from market risk and does not ensure a profit. Short Duration bond funds may invest in corporate and other investment-grade US fixed income issues that have duration of one to 3.5 years.
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