Interest Rates Are Rising, Time to Think about “Float” Again

Time to Think about Float Again

The Crash of 2007 to 2010 took even the greatest of the money market funds down.  It taught us that due diligence and liquidity matter.

Those who survived were by in large chastened by a near death experience.  They now long for the 5 to 10% of total revenues that “float” and higher interest rates brought them.  Rates are rising slowly.  It’s time to start watching the signs and learning about where to invest funds.  You will find that the environment has changed.

What happened to the markets as a result of the crash?
The Fed got serious about regulating shaking banks and mortgage companies who used “boiler rooms” to sell poor quality paper to money market funds.  The also dropped interest rates to zero by buying government paper and mortgages, and we know that as interest rates fall, the price of fixed rate paper goes up.  High grade paper is now that unsustainable high prices, which will drop very quickly when the Fed starts to both sell their fixed rate holdings and push rates high enough to encourage investors to come back into the market.  Today those investors, like you, have mountains of cash sitting on the side lines waiting to get a decent return.

What happened to money market funds as a result of the crash?
Many went out of business.  Some drove away customers who had to wait months to get their funds back.  Some left because regulators said they needed more capital and better business practices if they wanted to play again.  The industry changed.  Prior to the crash almost all money market funds promised immediate payment on demand to return $1 for each $1 invested.  When the crash came many found that when they went to sell fixed income paper, they could not get a dollar for it.  Market prices had fallen and they could only get 90 to 95 cents on the dollar.  The difference wiped out their capital, and money market share holders lost money.  If the money they had invested was tax money, for example, they had to make up the difference by using their own capital and lines of credit.  President Bush stepped in and said that the Government would “insure” that no money fund would fail.  His action saved the market.

The surviving money funds, with a push form their regulators, changed the way they did business.  Today you can invest in money funds which invest only in government paper.  From them, they promise that they will pay back a $1 back for each $1 invested.  Because they deal only in high grade government paper, investor will get paid a lower return, but get better liquidity, lower risk, and lower management fees than money funds which do not promise a $1 for $1 exchange value.  A new group of money market funds will reprice the net asset value (NAV) of the portfolio of fixed instruments they hold, at least daily, much like equity and bond mutual funds do today.  Investors in these money funds will be subject directly to moves in the interest rates and general bond markets.  If rates go down, they make money.  If rates go up, they will lose money.  If you have a tax account with $10 million which is invested in an NAV money market fund on the day the Fed raises interest rates 25 basis points (as promised), you lose.  If interest rates today are 2% below normal, and the markets “revert to the mean”, you are on track to lose much more.  Your losses will come out of your cash flow, working capital, savings…

Some of you will make that bet, no matter what I say.  Most, I hope, will act more prudently.  The markets are stacked against the speculators at this time.  If rates stay low, you will earn nothing from your float but the meager “compensating balance rate” your bank will pay you to buy down your bank service charges.  If rates go up your income goes up (depending on the credit quality of the paper you are buying, and it’s duration), but the value of your position will go down in an NAV fund.

You should avoid this risk by using highly rated and ethical money market funds; managed by experienced managers with good track records who will return to you $1 each invested $1.

It’s time to do your homework, to select strong and well managed money market funds, and to start moving funds out of very low returns on your banks compensating balance earnings credit, and into qualified money market funds which will return all your principle at your request for liquidation.  Your investment advisor can help you on the phone or online.

Regulation on the Horizon, Cybersecurity a Threat Now

Regulation on the Horizon, Cybersecurity a Threat Now

Fintech:  computer programs and other technology used to support or enable banking and financial services

Banking:  a bank is a financial institution that accepts deposits from the public and creates credit.  Due to their importance in financial stability of a country, banks are highly regulated in most countries.

HCM:  Human Capital Management brings together payroll services, talent management, human resources management, time and labor management, and benefits administration.

(attribution for these definitions: google, the company that “does no harm”)

Regulation:  a rule or directive employed in controlling, directing, or managing an activity, organization, or system, and maintained by an authority and having the force of law.

The three financial service segments listed above have many good and bad things in common.  At their most basic level they all deal with third party flows of funds, and with important corporate and personal data through activities and systems which, if done well, bring great value to customers and providers alike.  If done poorly, recklessly, and/or through fraud can destroy people, companies, and financial systems.

Banks have been regulated by societies for three thousand years; sometimes well and to the benefit of their citizens.  Sometimes poorly to their citizen’s dismay and ruin.

Fintech and HCM will be regulated, but are not yet.  Unregulated they run the risk through negligence, fraud, poor architecture, or insufficient protection (from attach, breech, and failure) to protect customers and third parties from harm and loss.  In a civil world, much of the regulation would come from internal safe and sound policies and practices.  We, unfortunately do not live in a civil world.  Good behavior needs to be reinforced by a governing authority and the force of law.

Regulation will come, but you can and should prepare for it.
Great vision and values for a company are fundamental to self-regulation.  No vision, no values.  No values, no ethics.  No ethics, no morals.  No morals, no rules, no responsibility; everything is fair game.  No responsibility, more regulation!

Great vision, values, strong internal business practice, and regulation by third parties takes some of the fear and threat out of business.  Loose controls of customer tax and benefits payments add risk to service providers.  Strong rules, controls, and audits decrease those risks to the provider and to the system of funds flows in the country.  They decrease the possibility of errors and fraud.  That’s good because to most fintech and HCM companies the flow of funds they handle vastly exceeds the capital owners, shareholders, and even their insurance companies have to deal with a major system failure.

Have I got your attention?  If I have, send me an e-mail saying “you have my attention fear monger!”

My fear of inattention to cybersecurity threats is even greater than my fear of flow of funds risks outlined above.  We know how we should control funds flows.  We greatly underestimate the risks of gathering, storing, using, and protecting data and flows of data.

New York State is focusing on things that I fear in data flows and cybersecurity.  They are passing banking regulations that frankly sound like good business practice, and which I hope will become the standard of care in the fintech and HCM world, and, your own company’s standard of care and good business practice.  They are focusing on business (banks) and their owners (members of the Board of Directors and senior management).  We can learn from their activities and focus.  Some of the areas of focus:

  • Written cybersecurity programs
  • Written cybersecurity policies and incident response plans
  • Continuously trained cybersecurity personnel
  • Limited access privileges

Cybersecurity programs refer to:  identification of cyber risks, policies and procedures to protect data, detection of cybersecurity events, responsiveness to events to mitigate fallout, recovery restoration of normal operations.

Cybersecurity policies and incident response plans include:  information security policy, data governance rules, access controls, business continuity and disaster recovery plans and resources, capacity and performance planning, systems operations, systems and network security, systems and network monitoring, systems and application (including Report Writer) and quality assurance, physical security, customer data privacy, vendor and third- party service provider management (think API’s and third party software), risk assessments and incident response (internal and external).

Third Party personnel management programs include:  identification and risk assessment of third-parties, third-party cybersecurity work and practice standards, due diligence processed used to evaluate the adequacy of third-party cybersecurity practices, and periodic assessment.

Additional requirements:  annual penetration testing and vulnerability assessments, on-going existence of audit trail systems, limitations and review of access privileges, written application security procedures, annual risk assessment of the confidentially, integrity, and availability of information systems, adequacy of controls, and how identified risks will be mitigated or accepted, multi-factor authentication for individuals accessing internal systems who have privileged access or to support functions including remote access, monitoring of authorized users, encryption of all nonpublic information held or transmitted.

The lists have been produced by Astech Consulting, a firm I have known, advised, used, and respected for years.  You can review what they do for their clients and for you at

The price for being prepared in terms of time, effort, and investment is moderate.  The cost of neglecting these best practices can be the loss of your company and numbing lawsuits.  The consequences of failure are so important to how we do business in the future is so high, that these financial services will be regulated.

Best to be ready.  Best for your customers, for you and for your business.