OREANDA-NEWS. Corporations that heavily rely on money funds for cash management may need to enhance disclosures and risk management in light of upcoming money fund reform, according to Fitch Ratings. We believe the reform is creating a new paradigm for corporations' cash management, which will require a more sophisticated approach to managing liquidity.

Regulatory changes to money funds coming into effect in October are expected to cause some US corporates to re-examine their comfort level with prime money funds. Under the new reforms, institutional prime money funds that are used by corporates may restrict investor liquidity during a time of stress. The funds' boards of directors can impose liquidity fees on shareholders looking to redeem cash, or gate the fund altogether, if the fund's liquidity level falls below the required regulatory threshold. Government money funds are not subject to these provisions, and many corporate treasurers plan to move cash from prime to government funds to avoid this risk.

Non-financial corporates historically have been big investors in money funds in absolute terms, holding $573 billion in money fund investments as of 1Q2016, according to Federal Reserve data. Fitch's analysis of the non-financial firms in the Fortune 100 showed that 33 noted investments in money funds and 22 disclosed the amount invested in money funds. For the 22 firms that disclosed investments, money funds accounted for 26% of their cash and cash equivalents on average.

Some corporates use money funds sparingly or not at all, while others utilize money funds extensively for daily cash flow management and strategic cash buffers. For example, Walgreens held $2.4 billion in money funds, which accounted for as much as 72% of its cash and cash equivalents, as shown in the following chart. Cisco was the largest money fund investor in the sample, with holdings of $7.2 billion, accounting for 81% of its cash and cash equivalents. Conversely, Apple invested $3.3 billion in money funds, representing a modest 18% of its cash and cash equivalents. These firms often had additional short-term financial assets, such as US Treasuries and commercial paper, which could be used for liquidity but were not classified as cash and cash equivalents.

From our review of these firms' financial disclosures, it is unclear whether they invest in prime funds, government funds, or both. For corporations that continue to rely on money funds, enhanced disclosures and risk management will be important to appropriately monitor key weekly liquidity measures in prime funds.

While Fitch's rating criteria for prime money funds have always focused on the funds' liquidity, the new rules introduce a higher standard in the form of a regulatory "tripwire." In light of this new risk, Fitch updated its money fund criteria in December 2015 to clarify our analysis of funds' intrinsic liquidity levels compared to the volatility of flows driven by the funds' investor profiles.