Corporate treasurers aren't generally rewarded for how well their short-term operating cash investments perform, Regan said. “They are the stewards of corporate cash, and they have a fiduciary responsibility to the stakeholders to protect those assets.”

Companies that decide to move assets out of money funds have “many options,” said Berretta, pictured at left.

“The easiest place to move it will be Treasury and government money market funds, which will retain their stable NAV,” he said, although that move could mean lower yields. “If they're going to want to maintain a certain return, then they will most likely seek direct money market securities like commercial paper and [certificates of deposit],” he added.

Berretta noted that the changes in money fund regulations are occurring at the same time banks face new capital requirements. Treasurers may be looking to move short-term assets, but “banks will have less appetite to take deposits,” he said.

Regan noted increased interest among larger corporate clients “in investments like commercial paper, CDs, fixed- and floating-rate corporate bonds, and asset-backed securities.

“Clients are already adjusting for what they anticipate will be a more complicated investment environment if, in fact, banks start to adjust their balance sheets and turn away some balances,” he said.

What About Repurchase Agreements?
As treasurers look at their options, one lesser-known short-term investment is repurchase agreements. Banks and broker-dealers raise short-term funds by selling securities they hold and agreeing to buy back that collateral for the same amount plus interest at an agreed-upon date.

The Association for Financial Professionals' 2013 Liquidity Survey showed that just 3% of respondents' portfolios was allocated to repurchase agreements, although 38% of the finance executives surveyed said their company's short-term investment policy permitted them to invest in repos.

From a corporate treasurer's perspective, repurchase agreements are more difficult to use than money funds, said Ben Campbell, CEO of Capital Advisors Group, pictured at right.

Money funds are easy to access, and they provide same-day liquidity, Campbell said, while most repurchase agreements settle the next day. “You lose an element of liquidity versus money market funds.”

Companies that use repurchase agreements usually do “tri-party repo,” which involves a custodian. Companies that want to start using repurchase agreements first have to put in place legal agreements, called tri-party master agreements, that govern the relationships between the company, the broker-dealer, and the custodian, Campbell said.

Since repurchase agreements entail counterparty risk, companies investing in them should “have a certain level of expertise in assessing counterparty credit risk,” said Lance Pan, director of research at Capital Advisors Group. Using repo may also require investing a minimum amount. “Corporate accounts on an individual basis may not meet that minimum requirement,” Pan said.

“Normally repo is the least-yielding asset in a money market portfolio,” Pan added, but said that may be less of a negative for corporates now that investing in money funds will mean dealing with a floating NAV. “Repo is something that's comparable to money funds,” he said. “You invest the money and your assets will be at par.”

The repo market is facing regulatory crosscurrents, though. For starters, the same Basel III liquidity requirements that are making big banks less interested in deposits are discouraging them from doing repo. But Pan said big banks' retreat from repo is being offset by an increase in activity from smaller banks and broker-dealers.

Meanwhile, the Federal Reserve and other regulators, concerned by the role that repo played in Lehman's demise back in 2008, want to strengthen the market to avoid fire sales. And the Fed—currently an active participant in the repo market, doing reverse repos with money funds as part of its quantitative easing—is due to exit that market.

Pan said the Fed's exit from the market is still a few years down the road. “They have to manage the Federal Reserve's balance sheet down to a certain level before they do away with reverse repos,” he said. “There need to be three, four years of transition.”

Campbell said that while Capital Advisors Group sees companies that are considering putting in place the infrastructure to purchase individual securities, if companies decide to do that, “they would probably consider a basket of securities, repo being one of them.”

Lee Epstein, CEO of Decision Analytics, a San Francisco company that advises treasurers on short-term investments, noted that repurchase agreements used to be a more common part of corporate treasuries' short-term investing, in the 1990s and earlier. He doesn't see the requirement that prime funds use a floating NAV restoring repos' popularity.

“That market has changed, the whole risk issue of Wall Street has changed, and I don't think they would be nearly as attractive today,” Epstein said.

Epstein also noted the counterparty credit risk exposure involved. Banks' ratings have declined since the financial crisis, and if a corporate is entering into a repo transaction with a bank subsidiary, like a broker-dealer, that unit might have a credit rating that's even lower than that of its parent, Epstein said.

Companies also have to be wary of the type of collateral involved. “Wall Street doesn't need to finance their Treasury positions,” Epstein said. “They need to finance their whole loan positions and their junk bond positions and their equity positions, which you may not be willing to take as collateral. You have to negotiate that.”

In the current environment, with rates on money market investments uniformly low, Epstein argued that few companies will abandon prime funds despite the challenge of a floating NAV.

If the new SEC regulations took effect immediately, “I don't think you'd see much of an exit,” he said. “Because I don't think there's much in the way of alternatives.”