The shift to a floating net asset value has some practical implications for treasuries that invest in prime funds. Most importantly, instead of settling once a day at the end of the day, funds will have multiple strikes during the day.
Most fund managers have announced schedules with three strikes a day, at 8 a.m. or 9 a.m. ET, noon ET, and 3 p.m. or 4 p.m. ET. Companies will have to be aware of funds' schedules and time their redemptions according to when they need the money.
Tory Hazard, president and chief operating officer at trading portal ICD, cites the example of a company that wants its settlement to arrive during the morning. Assuming the first strike is at 9 a.m., the company would have to make a redemption trade by that time. "The fund will price between 9 and 10 or 10:30, and the corporate can expect settlement between 10:30 and 11:30," Hazard said. If the company wants its money during the afternoon, it could trade by noon to receive settlement between 1:30 and 2:30 p.m., or trade by 3 p.m. to receive settlement between 4:30 and 5:30 p.m., he said.
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"One of the things corporates will need to be mindful of is that depending on when they invest or redeem during the day, they could wind up with a different share price for that investment or redemption," said Michael Berkowitz, head of North America and global liquidity product management at Citi.
"And if they're going to make a redemption, at what price did they buy into that fund, and do they want to take a gain or loss, or do they want to look for a fund to redeem that won't involve a gain or loss?" Berkowitz added.
Hazard noted that systems such as portals and workstations will need to be updated to be able to account for fund shares, since prime funds will go from trading on the amount of money involved to the number of shares.
A company will still place an order to invest, say, $10 million in a fund, he said. "But the workflow and operations will show the shares and whatever the strike price is."
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
